This study explores how performance shortfalls in specific host countries influence multinational enterprises’ (MNEs) regional foreign direct investment (FDI) strategies. Drawing on performance feedback theory, we argue that performance shortfalls in a host country triggers problemistic search, prompting firms to reduce intra-regional FDI while increasing inter-regional FDI. We further propose that this relationship is moderated by the institutional and economic diversity of the host region. In diverse regions, intra-regional FDI may be reinterpreted as opportunities for problemistic search rather than status quo reinforcement, altering firms' responses to underperformance. Given that problemistic searches typically begin locally, intra-regional FDI under these conditions becomes preferable to inter-regional FDI, thereby reducing relative inter-regional investment during periods of underperformance. Using a novel dataset of 3,536 firm-country-year observations from 379 U.S. manufacturing MNEs (2014–2022), we find strong empirical support for these hypotheses. Our findings contribute to international business research by introducing a behavioral explanation for regionalization strategies, and advancing the behavioral theory of the firm through a more flexible view of managerial search behavior.

qjoanne@ceibs.edu