When Do Ethnic Communities Affect Foreign Location Choice? Dual Entry Strategies of Korean Banks in China
Research has shown that firms typically expand into foreign locations with sizeable coethnic communities. However, in many cases the ethnic community influences the investment choice of the same firm in one location but not another. We offer an institutional lens to explain this heterogeneity. Ethnic groups function like informal institutions that facilitate transactions between foreign firms and customers, suppliers, and information providers through interpersonal exchange. Relying on ethnic communities to mediate transactions in foreign markets is valuable but limited by the relatively small scale of these communities. In contrast, relying on formal institutions allows firms to expand more broadly into foreign markets because the impersonal exchange inherent in formal governance is more scalable. This is manifested in “dual entry strategies” wherein ethnic communities have a significantly stronger influence on location choice in places with unreliable (weak and unstable) formal institutions than in places with reliable formal institutions. We found support for these ideas using a unique dataset of South Korean banks’ investments in Chinese provinces during 1992–2013. To mitigate endogeneity concerns, we exploited a historical migration that created a quasi-random distribution of ethnic Koreans across provinces. Our work contributes to research on international expansion, ethnic communities, and institutional theory.