The Strategic Importance of Location in Global Investment

Over the past few decades, emerging market multinational enterprises (EMNEs) have increasingly expanded their global presence through foreign direct investment. These firms, originating from countries such as India, China, Brazil, and others, are no longer confined to domestic or regional markets. Instead, they actively seek opportunities abroad to enhance their competitiveness, particularly through the acquisition of advanced knowledge, technology, and innovation capabilities.

A central question arises in this context: does investing in global cities significantly improve the innovation performance of these firms? While global cities are often perceived as hubs of knowledge, connectivity, and opportunity, recent research suggests a more nuanced reality. The benefits of investing in such locations may not always meet expectations, especially for firms coming from emerging economies.

Understanding Global Cities and Their Appeal

The concept of global cities, popularized by sociologist Saskia Sassen, refers to major urban centers that serve as key nodes in the global economic system. Cities like London, New York, Frankfurt, and Tokyo are characterized by dense concentrations of financial institutions, consulting firms, legal services, media organizations, and advanced technological ecosystems. These cities act as gateways to international markets and innovation networks.

For EMNEs, entering a global city offers several apparent advantages. First, these cities provide a cosmopolitan and internationally oriented environment, which can help reduce the “liability of foreignness”—the inherent disadvantages firms face when operating in unfamiliar markets. For emerging market firms, this is even more critical, as they often also experience what scholars call the “liability of emergingness,” meaning they may be perceived as less credible or less advanced than firms from developed economies.

Second, global cities offer exposure to cutting-edge knowledge and innovation. The proximity to leading firms, research institutions, and highly skilled talent creates opportunities for learning and collaboration. Third, these cities are deeply integrated into global production and innovation networks, making them ideal entry points for firms seeking to establish a global footprint.

The Hidden Challenges of Global City Investments

Despite these advantages, investing in global cities is far from a guaranteed path to innovation success. One of the most significant challenges is the intense level of competition. Global cities are crowded with powerful incumbents—established firms that dominate access to critical resources such as talent, knowledge, and market opportunities.

For EMNEs, this competitive pressure can be particularly problematic. Unlike local firms, they may face subtle or overt forms of discrimination, regulatory barriers, or protectionist attitudes. These factors can limit their ability to integrate into local knowledge networks and restrict access to strategic assets that are essential for innovation.

Moreover, the high costs associated with operating in global cities—ranging from labor and real estate to compliance and operational expenses—can further strain resources. As a result, the expected benefits of locating in these hubs may be diluted or even offset by the challenges.

Evidence from Indian Multinational Enterprises

Empirical research focusing on Indian multinational enterprises provides valuable insights into this issue. A study examining 170 foreign investments by Indian firms in medium- and high-technology manufacturing sectors reveals important patterns in both location choices and outcomes.

These investments include both acquisitions and greenfield projects. Acquisitions, where firms purchase existing foreign companies, are particularly common in industries such as pharmaceuticals and chemicals. Greenfield investments, involving the establishment of new operations from scratch, are more prevalent in sectors like machinery and transport equipment.

A significant portion of these investments—around three-quarters—are directed toward high-income countries. Within this group, approximately 30 percent are located in global cities, including major urban centers in Europe and the United States. Notably, investments in global cities tend to take the form of acquisitions, while those in lower-income regions are more often greenfield projects.

Innovation Outcomes: A Complex Relationship

When examining the impact of these investments on innovation performance, the findings are both encouraging and cautionary. On the one hand, foreign investments clearly contribute to improved innovation outcomes for EMNEs. Firms that invest abroad tend to generate more patents, and these patents often exhibit greater technological diversity, indicating higher levels of originality.

Acquisitions, in particular, appear to be more effective than greenfield investments in enhancing innovation performance. By acquiring established firms, EMNEs gain immediate access to existing knowledge, technologies, and capabilities, which can be leveraged to accelerate innovation.

However, the location of these investments plays a critical role. The research reveals that when investments are made in global cities, the positive impact on innovation is significantly weaker compared to investments in more peripheral locations. This suggests that the competitive environment in global cities may hinder the ability of EMNEs to fully exploit the potential benefits of their investments.

Furthermore, the advantage of acquisitions over greenfield investments diminishes when the acquired firms are located in global cities. In other words, even the most effective entry strategy becomes less impactful in highly competitive urban hubs.

Rethinking Strategy: Entry Modes and Location Choices

These findings highlight the importance of adopting a more strategic approach to international investment. For EMNEs seeking to enhance their innovation capabilities, it is not enough to simply invest abroad or target prestigious locations. Instead, firms must carefully consider both the mode of entry and the specific location of their investments.

Entry modes such as acquisitions, greenfield investments, strategic alliances, and non-equity partnerships each offer different advantages and risks. Similarly, location choices should extend beyond the national level to include regional and subnational considerations. Peripheral regions, industrial clusters, and emerging innovation hubs may offer more accessible opportunities for learning and growth, with less intense competition.

Beyond the Allure of Global Cities

The idea that global cities are the ultimate destinations for innovation-driven investment is increasingly being challenged. While these cities offer undeniable advantages in terms of connectivity and access to knowledge, they also present significant barriers, particularly for firms from emerging markets.

For EMNEs, the path to innovation success lies not in blindly following global trends, but in making informed, strategic decisions that balance opportunity with risk. By carefully selecting entry modes and considering alternative locations beyond global cities, these firms can better position themselves to capture the full benefits of international investment.

In a world where competition is intensifying and innovation is the key to long-term success, understanding the complex dynamics of global investment is more important than ever.