Siegel and Larson: Labor Market Institutions and Global Strategic Adaptation Labor Market Institutions and Global Strategic Adaptation: Evidence from Lincoln Electric Jordan Siegel and Barbara Zepp Larson Harvard Business School, Boston, MA 02163, jsiegel@hbs.edu and blarson@hbs.edu Although one of the central questions in the global strategy field is how multinational firms successfully navigate multiple and often conflicting institutional environments, we know relatively little about the effect of conflicting labor market institutions on multinational firms’ strategic choice and operating performance. With its decision to invest in manufacturing operations in nearly every one of the world’s largest welding markets, Lincoln Electric offers us a quasi- experiment. We leverage a unique data set covering 1996-2005 that combines data on each host country’s labor market institutions with data on each subsidiary’s strategic choices and historical operating performance. We find that Lincoln Electric performed significantly better in countries with labor laws and regulations supporting manufacturers’ interests and that Lincoln Electric performed significantly better in countries that allowed unconstrained use of incentive pay- for-performance. Furthermore, we find that in countries with labor market institutions unfriendly to manufacturers, the company was still able to enhance its performance significantly by what we term flexible intermediate adaptation. Key words: global strategy; institutions, labor market; adaptation; complementarity History: This draft is dated May 16, 2007. The first draft of this paper was dated October 1, 2006. ____________________________________________________________________________________ 1. Introduction One of the most significant questions in the global strategy field is how multinational firms should navigate their way through multiple and often conflicting host-country institutional environments (Ghoshal and Westney 1992, Morgan et al. 2001). In spite of the fact that most foreign direct investment (FDI) is still conducted by manufacturing companies whose profitability derives in large part from achieving labor productivity, we still know surprisingly little about whether labor market institutions, defined as formal and informal rules governing the labor market, matter for the operating performance of FDI, and if so which ones matter and how much they matter. Despite earlier calls for research in this area (Rosenzweig and Singh 1991), there has been little work done on the effect of labor market institutions on multinational firms’ strategic choice and performance (see one notable exception by Zaheer, 1995). The following questions are still largely understudied. Under what conditions should multinational firms simply avoid institutionally incompatible environments when the institutions affect 1