Performance below Aspiration in Host Countries and FDI Location Decisions: The Moderating Role of Institutional Distinctiveness of Host Countries

International business scholars have increasingly focused on the role of performance feedback in shaping MNEs' foreign investment location decisions, although most research has centered on the impact of feedback related to overall firm performance. Notably, these studies have yet to consider how MNEs' location decisions might vary depending on where they experience performance shortfalls. To address this gap, this study explored how MNEs' location choices are influenced by performance shortfalls relative to aspirations they experience in individual host countries. Specifically, the current research proposed that when MNEs experience performance shortfalls in a host country, they are more inclined to invest in countries with similar institutional characteristics, where they can leverage existing knowledge and capabilities in order to achieve swift performance recovery. Furthermore, the study suggested that the effect of performance shortfalls on MNEs’ location decisions is moderated by the degree of institutional distinctiveness of the focal host country compared to the firms’ existing portfolio of host countries. By analyzing data on 189 U.S. manufacturing MNEs' FDI activities from 2017 to 2021, I found support for the proposed hypotheses, shedding light on the nuanced dynamics of MNEs' strategic behavior. This study underscores that MNEs’ FDI location decisions are shaped by the characteristics of the host countries where they experience underperformance, offering a novel perspective on the relationship between performance feedback and MNEs’ location decisions.