Journal of International Business Studies (2013), 1–9
© 2013 Academy of International Business All rights reserved 0047-2506 www.jibs.net
RESEARCH NOTE
Beijing or Shanghai? The strategic location choice of large MNEs’ host-country headquarters in China Xufei Ma1, Andrew Delios2 and Chung-Ming Lau1 1 Department of Management, The Chinese University of Hong Kong, New Territories, Hong Kong; 2Department of Strategy and Policy, NUS Business School, National University of Singapore, Singapore
Correspondence: Xufei Ma, Department of Management, The Chinese University of Hong Kong, Shatin, New Territories, Hong Kong. Tel: +852 3943 7799; Fax: +852 2603 6840; email:
[email protected]
Received: 27 November 2011 Revised: 29 June 2013 Accepted: 28 July 2013 Online publication date: 19 September 2013
Abstract We argue that a multinational enterprise’s (MNE’s) location choice for its host-country headquarters (HCHQ) in the geographic space of the host country is determined by the interplay between the strategic roles of HCHQ in the organizational space of the MNE and the institutional space external and internal to the MNE. We focus on the location choice between Beijing and Shanghai. We test our arguments using data for a sample of Fortune Global 500 corporations in China (1979–2005). This study contributes to international business (IB) research by reinvigorating research on HCHQ. We also complement economic geography research on subnational agglomeration by using an IB perspective with a focus on the institutional idiosyncrasies of cities. Journal of International Business Studies (2013), 1–9. doi:10.1057/jibs.2013.49 Keywords: location strategy; multinational corporations (MNCs) and enterprises (MNEs); host-country headquarters; institutions; emerging markets/countries/economies
INTRODUCTION Research on location choice has examined where to locate a multinational enterprise’s (MNE’s) regional or divisional headquarters (Benito, Lunnan, & Tomassen, 2011; Birkinshaw, Braunerhjelm, Holm, & Terjesen, 2006; Enright, 2005). However, little is known about the location choice of a host-country headquarters (HCHQ), an increasingly important type of headquarters/subsidiary in the organizational space of an MNE, especially in emerging markets (Luo, 2007; Ma & Delios, 2010). We examine influences on the strategic location choice of an MNE’s HCHQ in China, where Beijing and Shanghai are the two largest, most important global cities (Goerzen, Asmussen, & Nielsen, 2013; Sassen, 2006). As Beijing and Shanghai have distinct institutional contexts (Ma & Delios, 2007), and these two cities become the dominant places for HCHQ location, we ask why an MNE chooses one city over another to establish its HCHQ. Drawing on research in international business (IB) and economic geography (EG) (Beugelsdijk, McCann, & Mudambi, 2010; Beugelsdijk & Mudambi, 2013), we propose that dichotomous distinctions between the two cities affect an MNE’s location choice for its HCHQ.
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We compare Beijing and Shanghai from three important institutional and geographical aspects: (1) political center vs business center; (2) influences of Chinese cultural values; and (3) geographic space within China. Selecting the HCHQ location strategically helps an MNE to better realize the HCHQ’s three strategic roles: corporate ambassador, subsidiaries administrator, and learning center (Birkinshaw et al., 2006; Chandler, 1991). Accordingly, we develop an IBbased conceptual framework to examine how government intervention, geographic proximity, and institutional distance affect this location choice. The research contributions of this study are twofold. First, we contribute to the MNE location choice and MNE subsidiary literature by linking HCHQ’s strategic roles to its strategic location choice. Second, our research complements EG research on subnational agglomeration (Fujita, Krugman, & Venables, 1999; Gabaix, 1999) by taking an IB perspective and focusing on the local institutional contexts of cities (Meyer, Mudambi, & Narula, 2011). Based on an IB perspective (Henisz, 2003), we argue that the choice of one city over another in establishing an MNE’s HCHQ reflects the alignment between an MNE’s subsidiary-specific roles and the institutional idiosyncrasies of potential cities. We thus contribute to research on subnational agglomeration, such as Zipf’s law for size distributions of cities in emerging markets, an important issue in EG research (Anderson & Ge, 2005; Giesen & Südekum, 2011; Soo, 2005).
BACKGROUND The Strategic Roles of HCHQ An HCHQ is a special type of headquarters and foreign subsidiary. Building on Chandler’s (1991) three functions of HQ units and IB research on host-country centers (e.g., Luo, 2007), we identify three strategic roles for an MNE’s HCHQ: (1) corporate ambassador to deal with host-country governments; (2) administrator to monitor and control all the MNE’s host-country subsidiaries; and (3) learning center to exploit MNE-specific knowledge in the host country (Birkinshaw et al., 2006; Chandler, 1991; Ma & Delios, 2010).
Journal of International Business Studies
MNE Location Choice and Subnational Agglomeration Research on MNEs’ location choice has moved from the country level to subnational regions (e.g., Beugelsdijk et al., 2010; Ma, Tong, & Fitza, 2013). As stated by McCann and Mudambi (2005: 1862): The locational analysis of the MNE at the subnational regional level is now coming to be regarded as ever-more important … within individual countries, identifying the conditions under which MNEs will locate in large or small urban cities, in central or peripheral locations, and in specialized or diversified areas, is now regarded as essential.
A related important stream of EG research emphasizes subnational agglomeration, with a focus on the concentration of economy activity in cities within a country (Fujita et al., 1999; Gabaix, 1999; Soo, 2005). Within this literature, studies have addressed the rank-size rule for city sizes known as Zipf’s (1949) law, which states that the upper tail of the city-size distribution can be described by a Pareto distribution with shape parameter equal to −1. This implies that a country’s largest city is approximately twice as large as the second largest city, three times as large as the third largest city, and so on (Giesen & Südekum, 2011). In emerging economies, however, the patterns of the city-size distribution differ from the predictions of Zipf’s law (Anderson & Ge, 2005; Soo, 2005). In BRIC countries (Brazil, Russia, India and China), there are two similarly sized, very large, prominent metropolises: Brasilia and São Paulo in Brazil; Moscow and Saint Petersburg in Russia; New Delhi and Mumbai in India; and Beijing and Shanghai in China (Ma & Delios, 2007). Even small emerging economies have two similarly sized distinctive metropolises, such as Ho Chi Minh City and Hanoi in Vietnam. These pairings of cities are strategic (Goerzen et al., 2013; Sassen, 2006). They represent either political or economic centers. There are two common agglomeration forces for HQ units (Davis & Henderson, 2008). First, HQ operations can be made more efficient by the existence of large-scale business and financial intermediation services offered in central metropolitan areas (Bel & Fageda, 2008). Second, clustering in HQs can benefit from the cross-HQ exchange of information on market, social, and environmental conditions (Lovely, Rosenthal, & Sharma, 2005). However, given the existence of two prominent metropolises, the choice of HCHQ location in large emerging economies is as a competitive choice between the two major cities, not a default to a central, dominant metropolitan area as suggested by Zipf’s law.
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Research Setting: Beijing vs Shanghai We focus on China because of the diffusion of recent HCHQ establishment by Fortune Global 500 corporations in China, and the centrality of Beijing and Shanghai to HCHQ establishments. A survey of China’s top 100 cities (NBSC, 2004), which used the weighted average scores of economic development, social development, human capital, physical infrastructure, and environmental development, ranked Beijing and Shanghai as China’s foremost competitive cities (see Table 1). In contrast to Zipf’s law, Beijing and Shanghai are almost equally competitive along economic/geographic dimensions, and they are the dominant choices for MNEs’ HCHQ in China. However, significant differences exist between these two cities (Ma & Delios, 2007). Aside from the distinction between Beijing as a political center and Shanghai as a business center, Beijing is more influenced by China’s traditional cultural values, and Shanghai is a more foreign-oriented city (Schlevogt, 2001). Geographically, Beijing is located in the north, and Shanghai is in the south. These distinctions have important implications for HCHQ location choice.
THEORY AND HYPOTHESES DEVELOPMENT Recent IB research emphasizes an MNE’s ability to manage idiosyncrasies effectively in its institutional environments (Henisz, 2003). We argue that the strategic location choice for an MNE’s HCHQ aligns the HCHQ’s strategic roles (corporate ambassador, local administrator, and learning center) with the
Table 1
institutional idiosyncrasies of potential cities. Using this logic, we develop a framework proposing that the HCHQ location choice in the geographic space of the host country is determined by the interplay between the strategic roles of the HCHQ in the organizational space of the MNE and the institutional space external and internal to the MNE (Lorenzon, Mauer, & Staber, 2012; Yeung, 2005).
Corporate Ambassador and Government Intervention As a corporate ambassador, the HCHQ represents the MNE in dealing with host-country governments, which control resources and opportunities shaping MNEs’ industrial landscapes (Ma & Delios, 2010). Industries vary in terms of government interventions. First, there are foreign ownership restrictions in designated industries (Lu & Ma, 2008). As Foreign Direct Investment (FDI) restricted industries are regulated in a non-market way by the central government, the effects of national-level government intervention are stronger in these industries. Second, industries vary in their requirements for global integration (Porter, 1986). In global industries, a firm configures its global value-chain activities to integrate its global efforts across different countries (Porter, 1986). However, if unmanaged, government intervention can make global integration difficult to achieve. HCHQ is the corporate ambassador to bargain and cooperate with the host-country government. If we compare Shanghai and Beijing, the potential
A comparison between Beijing/Shanghai and the rest of China’s top 10 citiesa,b
Beijing Shanghai Mean of Beijing and Shanghai Maximum of the other eight top citiesc Mean of the other eight top citiesc Difference between meansc t-valuec Maximum of the other eight top citiesd Mean of the other eight top citiesd Difference between meansd t-valued
Overall
Human capital
Economic development
Social development
Physical infrastructure
Environmental development
290.35 369.62 329.99 220.81 129.82 200.17 4.99** 220.81 116.42 159.13 4.76**
59.50 40.33 49.92 33.77 22.76 27.15 4.54** 25.78 15.50 34.42 5.12***
80.71 124.57 102.64 77.83 47.88 54.76 3.35* 77.83 48.88 53.75 3.41**
59.62 81.07 70.34 49.82 24.74 45.61 4.62** 49.82 21.66 48.68 4.37**
66.81 87.77 77.29 54.12 26.87 50.41 3.50** 54.12 22.55 54.74 3.75**
23.72 35.88 29.80 23.19 7.57 22.23 4.11* 23.19 7.83 21.97 4.19**
*p
