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When Do Ethnic Communities Affect Foreign Location Choice? Dual Entry Strategies of Korean Banks in China,

Sunhwang Gwon, Zeke Hernandez

Research shows that firms tend to expand into foreign locations with sizeable co-ethnic communities. Yet many cases exist in which the same firm chooses to co-locate with an ethnic community in one location but not in another. We offer an institutional lens to explain this heterogeneity in location choice. Ethnic groups function like informal institutions by facilitating exchange between a foreign firm and customers, suppliers, and information providers in the host location. We argue that relying on ethnic communities to mediate transactions in foreign markets is valuable but limited because the number of possible exchanges is confined by the scale of these communities. In contrast, relying on formal institutions allows firms to expand more broadly into the foreign market because formal governance relies on impersonal exchange, which is more scalable. This is manifested in ‘dual entry strategies’ by which ethnic communities have a significant positive influence on location choice in places with reliable formal institutions but not in places with unreliable formal institutions. We test these ideas with a unique dataset covering the locations of all South Korean banks across Chinese provinces during 1992-2013. Taking advantage of a historical migration that created a quasi-random distribution of ethnic Koreans across provinces, we find support for our ideas. Our work contributes to research on foreign expansion, ethnic communities, and institutional theory.

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