Abstract: Although similar formal regulations to protect property rights have proliferated across many parts of the world, the adherence to these norms is not consistent across countries. As a result, countries with seemingly similar formal regulations pose very different hazards for investors. Departing from traditional studies have focused on formal regulations of host countries in explaining institutional hazards for Multinational Corporations’ (MNCs) strategic actions, this paper focuses on the extent of de facto protection. I argue that in making location choices for their multinational investments, MNCs identify institutional hazards from the extent of de facto protection. Their perceptions of de facto protection are influenced by global and local pressures that align the interests of the host country towards providing effective protection in addition to the formal regulations that govern them. Large MNCs, with extensive international experience, are better able overcome poor de facto protection in a host country. They do so by either transferring learning on managing poor institutions across their international operations or by their ability to arbitrage international location differences. Using a panel of 161 firms from 16 home countries and their foreign investments in up to 66 host countries in the information services offshoring sector from 2002-2005, the empirical results provide support for the arguments.

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