Abstract—This study attempts to examine how emotions (happiness in particular) affect the performance of foreign subsidiaries. Our hypotheses are tested on a large sample of foreign firms located in China during the period of 2006-2013. Our results provide evidence for the strong influence of happiness at the sub-national level. We also find that happiness has a weaker positive effect on the performance of foreign subsidiaries with a longer length of operation or a higher level of domestic ownership. Our study extends the literatures of international business by examining the effects of emotion, an important yet under-researched factor, on foreign firm performance. The findings of our research also have important practical implications for foreign firms operating in countries with heterogeneous sub-national regions by showing the importance of examining emotion in the analysis of the business environment for international operation.