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Working paper

Structural decisions of multinationals in regions with weak courts

We investigate the impact of court conditions on multinational decision on entry, subsidiary size and entry mode across subnational regions in Russia. we apply the literature on heterogeneous frims and the institution-based view of investor behavior, which predict that higher institutional costs raise the size and productivity cut-off of start-up subsidiaries. Our empirical results based on microestablishment data of foreign-owned firms in Russia show that a weaker judicial framework and stronger political power of the local governor significantly de-stimulate entry. The majority of multinationals enter Russia, which is veiwed as a high-risk country, through large and very large subsidiaries wholly owned by the foreign parents. Variation of the business strategies of multinationals between regions is largely explained by regional court conditions, as foreign investors adapt their strategic decisions to compensate court deficiencies by increasing the size of the subsidiary and acquiring local institutional knowledge through partnership with resident firms. We also find that structural adjustments to court risks are typical for horizontal investments, which only serve the host market.