When do firms choose global cities as foreign investment locations within countries? The roles of contextual distance, knowledge intensity, and target-country experience

Foreign investors generally need to overcome a liability of foreignness stemming from contextual distance between their home country and the target country. We argue that they can limit that liability more easily by investing in a global city rather than elsewhere in the target country. Accordingly, we hypothesize that the contextual distance to a target country has a positive effect on a firm’s propensity to invest in a global city in that country. We also predict that this effect is stronger for investments in knowledge-intensive activities and weaker for investors with more target-country experience in general and target-country experience in global cities in particular. Our hypotheses receive considerable support in an analysis of 11,748 foreign greenfield investments by 1,025 manufacturing and service firms during 2008-2012. Our findings suggest that global cities are superior subnational locations for gathering contextual knowledge about target countries and limiting the liability of foreignness.