Market Size, Legal Institutions, and International Diversification Strategies: Implications for the Performance of Multinational Firms

Zusammenfassung

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Recognizing that country-specific resources are generally difficult to imitate or diffuse across national boundaries, we propose that home country conditions are key determinants of firms' strategic choices. By embracing insights from both institutional economics and resource-based view, we identify two country-level environmental constituents - domestic market size and legal institutions - to examine how these resources influence multinational firms' international diversification strategies. We further propose that home country legal institutions moderate the link between geographic diversification and firm performance. These hypotheses are tested with historical data on 435 multinational firms based in 13 developed economies. Results suggest that a multinational firm's degree of international diversification has a U-shaped relationship with the size of the firm's domestic market; firms from civil law countries are more likely to pursue international diversification than their counterparts from common law countries; and the effect of international diversification on firm performance was more pronounced among MNCs from civil law countries.

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Auszug

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Market Size, Legal Institutions, and International Diversification Strategies: Implications for the Performance of Multinational Firms

Introduction

The country environment where firms are embedded can substantially influence their strategies and performance (Kogut 1988, Porter 1990). This insight has prompted a growing line of strategic management research (Bensaou/Coyne/Venkatraman 1999, Gedajlovic Shapiro 1998, Khanna/Rivkin 2001, Thomas/Waring 1999), and has been one of the general conclusions drawn from a large number of theoretical and empirical studies (Kogut/Walker/Anand 2002, Makino/Isobe/Chan 2004, Mayer/Whittington 2003, Wan/ Hoskisson 2003). Because a firm typically develops within a domestic context prior to expanding abroad, the national home base plays a key role in shaping its approaches to strategy and organization worldwide (Hamilton/Biggart 1988, Kogut/Walker/Anand 2002). Correspondingly, the competitive advantages that firms enjoy internationally may, in fact, reflect the embedded comparative advantages of the countries those firms emanate from (Porter 1991, Shan/Hamilton 1991).

Despite the importance of such country effects, previous studies have mainly focused on industry, corporate, and business unit effects to explain firm strategies and performance (e.g., McGahan/Porter 1997, Rumelt 1991). For instance, the industrial organization economics perspective posits that industry structure is the primary determinant of a firm's strategic decisions and long-term profitability, leading to a prediction that firm performance varies more between, rather than within, industries. By contrast, the resource-based view of the firm suggests that a firm's resources and capabilities are the major sources of its sustainable competitive advantages, leading to a prediction that firm performance varies more between firms than between industries. Although such perspectives have substantially enhanced our understanding of the antecedents of firm strategies and performance, they have concentrated almost exclusively on examining the performance of firms with diversified business units in a single-country context, thus treating country effects as external to firm strategic decision making and performance.

As one excellent exception, Wan and Hoskisson (2003) studied how country environment affects corporate diversification strategies and resulting firm performance. Drawing primarily on arguments from institutional economics (e.g., North 1990), the...

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