Federalism, political uncertainty, and location choice of foreign investors: A comparative analysis of India and the USA

The state of IB research is relatively weak on establishing a systematic understanding of micro-level determinants relating to political uncertainty that are likely to influence foreign investments, especially for host countries with a high degree of sub-national institutional, cultural, and socio-political differences. The context-specific workings of local politics make it difficult to fit into a broader theory of political uncertainty for foreign investors. This conceptual study explores how political arrangement of federalism enhance or dampen uncertainty for MNE subsidiaries. We identify two important mechanisms associated with federal politics, namely the systems’ capacity for federal integration and degree of centripetality/centrifugality within a federation, which is likely to influence location choice of foreign investors. Drawing on a diverse stream of literature from political science, economics, and IB, we focus on leadership stability and political regime changeability to develop an organizing framework, capturing the core generators of political uncertainty. Case-based insights of the federalist dynamics of USA and India are utilized to complement the discussion. We outline key theoretical and managerial implications along with avenues for future IB research.