Headquarters location decisions under conflicts at home: Evidence from a configurational analysis

Mariano Méndez-Suárez

Abstract

This study identifies the necessary and sufficient conditions to relocate firms’ headquarters (HQ) under circumstances of high political and economic risk (the illegal referendum of Catalonia in 2017). One of the most promising advances in the discussion of relocation decisions lies in combining non-economic conditions with traditional production factors. We use fsQCA methodology to test the model. QCA is a method based on set theory in which the outcome depends on combinations of elements, that have the nonlinear property and permits that certain conditions act in opposite ways under different circumstances. Using a database of 42 companies of different sectors, 28 of them that maintained HQ and 14 that relocated, the study provides evidence that family firms under similar circumstances may make decisions to stay or relocate as a function of the origin of the founders and the production factors of the relocation region. Second, we found that relocation decisions of subsidiaries under political and economic uncertainty are not affected by economic fac-tors and there is inertia in their behavior

Introduction

Except when the firm faces severe conflicts at home, the decision of relocating headquarters (HQ) is rare, and has substantial impact on both the old and new HQ sites as it would require replacing many individuals working in specialized roles who may not be willing to relocate (K. E. Meyer & Benito, 2016). But apart from the relocation of individual employees, HQ relocation affects the whole business operation (Gregory et al., 2005) and for the re-gions, losing HQ induces employment losses, decreases in the quality of labor markets (Strauss-Kahn & Vives, 2009) and worsens the image trademark of a city or place (Clouse et al., 2020). However, this complicated decision was taken by more than 3,000 companies (Garijo, 2017) that relocat-ed their HQ during 2017 to other Spanish regions due to the unprecedented rise in political uncertainty due to the Cat-alonian illegal secessionism referendum (Reid, 2017). The impact of uncertainty was especially severe on big banks, which suffered a huge increase in liquidity risk due to the mass withdrawal of bank deposits until they relocated.

Other well-known companies of different sectors, in-cluding auto, distribution, food, fashion, pharmaceuticals, and others, decided to maintain the sites of their HQ despite the high level of political uncertainty. Even though it was a risk, many companies decided to change the location of their HQ and a large number of other companies decided to stay. This provides a database of great value to be able to an-alyze the phenomenon of the location of the headquarters of companies in troubled times. Based on this data, the present research tries to answer the following research questions:

• Which reasons/conditions were necessary or sufficient for the firms to maintain HQ in Cata-lonia in a period of high economic and political uncertainty?

• Were the reasons the same for all the companies that maintained their HQ?

In line with other authors who study location prob-lems, instead of isolating regional factors, the present re-search addresses the problem in a holistic manner (Cui et al., 2020) using fuzzy-set qualitative comparative analysis (fsQCA) methodology (Ragin, 2008). The methodology permits to empirically identify and interpret the identity, socio-psychological, and economic configurations associat-ed with the outcome of the permanence of the firms HQ in Catalonia. The methodology infers causality from set-the-oretic relations rather than correlations (Fiss, 2011; Ragin, 2008). The fsQCA provides enhanced methodological rigor to multi-case analysis by allowing the researcher to system-atically analyze a far greater number of cases than can be subjectively assessed (Fainshmidt et al., 2017).The present research makes several important con-tributions in the design of the propositions, because it ac-knowledges the nonlinearity property of configurational approaches (Fiss, 2007; Meyer et al., 1993), so variables found to be causally related in one configuration may act in the opposite way in another configuration causing the oppo-site outcome. That is, under the same circumstances, similar environments, and political-economic situations. The same condition may cause firms to make opposite decisions, to either maintain or relocate HQ. Additionally, following the call from Jain et al. (2016), we include the impact of the governance structure, family firms and subsidiary, to deter-mine location choice. Additionally, this study contributes to extant literature by identifying the different sets of condi-tions that explains the different motives and typologies of firms that maintain HQ sites in periods of high political and economic turbulence.The article is organized into several sections. The next section provides the theoretical background to support the research propositions. The data and methods are presented in the third section, followed by a discussion of results in the fourth section. Finally, concluding remarks are presented.

Theoretical Background

To select the conditions that caused the outcome of staying or relocating HQ, this study acknowledges the lim-itations of considering only economic factors (Musteen, 2016) and integrates non-economic conditions such as those related to the origin and if the firm is a family busi-ness or not. Conditions related to the firm’s position towards separatism, including support for independence and the ref-erendum and purely economic conditions, as if the firm is a subsidiary of a multi-site firm and purely economic factors as those represented by the European Regional Competi-tiveness Index of the region in which the HQ are located after the outcome decision

In the design of the propositions, the present research acknowledges the nonlinearity property of configurational approaches (Fiss, 2007; Meyer et al., 1993), so variables found to be causally related in one configuration may be unrelated or even inversely related in another. That is, the same condition may cause firms in similar environments to respond differently to the situation created by the referen-dum and either to stay or relocate its HQ.

Origin and Family Business

Empirical evidence suggests that for the largest firms the corporate head office mostly remains located in the orig-inal home base irrespective of the firm’s subsequent growth in geographic footprint (Coeurderoy & Verbeke, 2016). Most founders are people embedded in their home environ-ments, with personal ties, close to family and friends (Mey-er & Benito, 2016) and preserving their corporate identity (Desai, 2009). In fact, firms are deeply rooted in their home countries, to their customers, employees, investors and sup-pliers (Ghemawat, 2011).

There is evidence that founders have a substantial im-pact in the inertia of companies to maintain their original HQ location (Lussier & Sonfield, 2009). Business people develop an emotional attachment to their place of origin and feel responsible toward the community that enabled them to grow (Meyer & Benito, 2016). Furthermore, family firms are usually part of the social network at the local level, sponsoring associations and activities related to the com-munity and pursuing the welfare of the locality (Berrone et al., 2010) and relating the firm’s success to the origin of the founders (Castillo & Wakefield, 2006)

Regarding risks, family firms are likely to place a high priority on maintaining family control even if this means accepting an increased risk of poor firm performance. They may also act more conservatively by avoiding business de-cisions that may increase variability even at the price of a business failure in the future (Gómez-Mejía et al., 2007). Research based on behavioral economics has empirically shown that family firms’ risk willingness or risk aversion depends on the scenario and the way in which each scenario might threaten these firms’ priorities (Llanos-Contreras et al., 2020; Stieg et al., 2018). These arguments lead to the following proposition:

Proposition 1. The origin of the founders is relevant and has a positive influence in the decision to maintain its HQ. Being a family business may influence the decision to stay when considering the roots of the family but also may influ-ence the decision to relocate considering the perceived risks for the business

Support for Independence and the Referendum

Catalonia is a territory where part of the population de-clares a Catalan national identity, defined as the attachment that subjectively links individuals to the nation (Rodon & Guinjoan, 2018). Although the support for independentism and the referendum was not majoritarian, the stronger asso-ciation with Catalan identity made some business associa-ions give explicit support to the referendum and indepen-dence (El Nacional, 2017). On the opposite side and because of the polarization of society regarding those issues, other associations or companies declared against the referendum and independentism

For some companies, the institutional support for the referendum may be considered a decrease in quality of the legal and regulatory regime and make them consider re-locating their HQ. However, other companies, which ex-plicitly support the referendum, may consider this fact as a positive change in the regulatory and legal regime. The configurational approach supports the apparently contradic-tory conditions that may lead to opposite outcomes, leading to the following proposition:

Proposition 2. Support for independence and the referen-dum may be relevant to the decision of maintaining their HQ, but for companies not supporting the referendum nor in favor of independence, it may be relevant to make the decision to relocate their HQ.

Subsidiary and Regional Competitiveness Index

There are important reasons to maintain the location of subsidiaries for multi-site firms, such as the relations with local suppliers and customers (McCann & Mudambi, 2005). Other key aspects in the location decisions are the closeness to the different sites, to minimize transport costs, or those related to management optimization around the world (De-sai, 2009)

For the owners of subsidiaries, the decrease in institu-tional quality in the host region increases the likelihood of relocation to another place, moving away from local gov-ernments with unfavorable policies that increase the institu-tional uncertainty (Valentino et al., 2019).

Regarding factors of production, previous research finds relevant to the location decision their abundance and quality including the physical, human and financial resourc-es available to firms in a given region. The quality of infra-structure provided by the economy’s transportation, com-munication, education and healthcare systems, as well as access to advanced factors of production, such as a scien-tific base and highly skilled labor (Cui et al., 2020). Addi-tionally, relevant factors include the quality of air services, proximity to large markets and specialized providers and the availability of skilled labor (Bel & Fageda, 2008). The Regional Competitiveness Index (RCI) in Europe analyzes the quality of those factors for regions across the European Union measuring, with more than 70 comparable indicators, the ability of a region to offer an attractive and sustainable environment for firms and residents to live and work (An-noni & Dijkstra, 2019). These arguments lead to the follow-ing proposition:

Proposition 3. Being a subsidiary of a multi-site company is relevant to maintain its HQ.Considering RCI is relevant to location decisions.

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