Beauty in the Eyes of the Beholders: How Government- and Consumer-Based Country-of-Origin Advantages and Disadvantages Drive Host Country Investment Dynamics.

VerfasserCuervo-Cazurra, Alvaro

1 Introduction

We study how a foreign firm's country of origin influences its investments in the host country. The impact of the country of origin has been discussed in two related but separate sets of literature: one in marketing that analyzes country-of-origin effects on the sale of products, and another in strategy that studies the liability and advantage of foreignness. On the one hand, in international marketing, the country of origin of a product has been discussed as an important source of disadvantage or advantage when selling foreign-made products. This has resulted in numerous studies under the term country-of-origin effect, with related concepts such as consumer nationalism or consumer ethnocentrism (Antonetti & Manika, 2022; Fischer et al., 2022; Herz & Diamantopoulos, 2017; Kong & Rao, 2021; Magnusson et al., 2019; Trinh et al., 2019). However, these studies pay little attention to how the country of origin affects firms themselves (Yu & Liu, 2018). On the other hand, the literature on the liability of foreignness focuses on the firm level and typically argues that subsidiaries of multinational firms face a competitive disadvantage as they incur additional costs that host-country firms do not (Caussat et al., 2019; Hymer, 1976; Zaheer, 1995; for a recent review, see Lu et al., 2022). A later literature discussed the advantage of foreignness that subsidiaries of foreign firms enjoy over domestic firms because of their privileged access to foreign technology (Nachum, 2010; Un, 2016). However, these studies tend to focus on foreign versus domestic firms rather than on how the country of origin drives behavior.

Hence, in this paper, we propose expanding these two research streams by bridging their insights in a novel manner. Specifically, building on the resourcebased view (Barney, 1991), we propose conceptualizing a foreign multinational's country of origin as a resource, an asset tied semi-permanently to the firm (Teece et al., 1997; Wernerfelt, 1984), and analyze how this resource affects its host country investments. Based on the notion that a resource not only creates an advantage but can also generate a disadvantage (Hitt et al., 2006), we propose that the country of origin provides an advantage or disadvantage in the host country depending on its positive or negative view among the host-country government and consumers. This results in four alternative configurations of host country investment dynamics based on the alignment of their views. First, when a multinational's country of origin generates a government-based advantage and a consumer-based disadvantage, the multinational is more likely to make larger initial investments to benefit from incentives and larger subsequent localization investments to disassociate itself from the country of origin. Second, when the country of origin creates a government-based disadvantage and a consumer-based advantage, the foreign firm is more likely to make smaller initial and subsequent investments to maintain its association with the country of origin. Third, when the country of origin leads to government-based and consumer-based advantages, foreign multinationals are more likely to make a large initial investment to benefit from government incentives and smaller subsequent investments to maintain their association with the country of origin. Finally, when the country of origin leads to government-based and consumer-based disadvantages, foreign multinationals are more likely to make smaller initial investments to minimize risk and larger subsequent investments to localize.

These ideas and their explanations contribute to international business research and its study of foreign market expansion (Hymer, 1976; Lu et al., 2022; Un, 2011; Zaheer, 1995), and to the resource-based view and its analysis of resources and advantage (Barney, 1991; Patnaik et al., 2022; Teece et al., 1997; Wernerfelt, 1984). First, regarding foreign market expansion (Lu et al., 2022), the paper discusses the disadvantage and advantage associated with the country of origin, which is still limited in the literature on foreignness (Benischke et al., 2022). Most foreignness studies have focused primarily on subsidiaries of foreign multinational firms abroad, treating them as a monolithic group and comparing them to host-country firms to identify their liability and advantage of foreignness (Hymer, 1976; Un, 2016; Zaheer, 1995). We delve deeper into variations among foreign firms by their country of origin, and explain how the specific country of origin rather than their foreignness in general can provide an advantage for some and a disadvantage for others. We also add depth to previous discussions by introducing differences between the host-country government and consumers in their valuation of the country of origin. Their alignment or misalignments results in conflicting pressures that drive foreign firms' investment dynamics, going beyond the usual focus of most studies on performance.

Second, the paper helps extend the resource-based view by explaining how the country of origin of firms, a resource common to several firms, can have a different impact on the firms' competitive advantage and drive diverging behaviors. The usual explanation of a resource providing a competitive advantage is based on whether it creates value for customers and is rare (Barney, 1991). We extend this traditional view by explaining how the country of origin can provide an advantage even when it does not create value for customers or is not rare. First, we expand the analysis of value creation with the idea that the country of origin can have two alternative sources of value creation, for customers as traditionally discussed, and for the host country government. Moreover, we extend the usual view of value creation with the positive view of the country of origin, which can associate the product with desirable characteristics that may not be backed by tangible characteristics, and which may diverge between the government and citizens. Additionally, the analysis of the country of origin introduces the creation of disadvantages from the negative perception of the country of origin. This extends the usual discussion of competitive disadvantage as originating from a lack of resources toward the existence of resources that actually detract from the advantage created by other resources. Second, we propose that the rareness is not based on the uniqueness of one firm, as the country is associated with multiple companies, and is common to all. Thus, in some instances, a resource that is common to a set of firms can still provide them with an advantage as other firms do not have the association with the country of origin.

2 The Resource-Based View and the Country of Origin as a Resource

2.1 Resources and Advantage

The resource-based view sees firms as bundles of resources that are used to generate products or services which serve the needs of customers in competition with the offers of other firms (Penrose, 1959). Resources are tangible and intangible assets that are tied semi-permanently to a firm (Teece et al., 1997; Wernerfelt, 1984; for a recent review, see Patnaik et al., 2022).

Not all resources provide the firm with an advantage. The effect of resources on advantage depends on their characteristics. Resources can be a source of advantage when they are valuable (i.e., help create value for customers) and rare (i.e., few competitors have them or have them in the same quality) (Barney, 1991). One example is a restaurant in a neighborhood that has an award-winning chef who can create new dishes that attract customers better than chefs in nearby restaurants.

However, despite the common assumption that all resources support an advantage, not all of them do so (Hitt et al., 2006; Montgomery, 1995). Some resources can be neutral with regards to advantage (Montgomery, 1995), meaning that they neither provide an advantage nor provide a disadvantage, because competitors have similar resources. For example, the restaurants in a neighborhood are provided with loans by the local bank; these are useful for the restaurants to operate and serve meals, but are similar among them and thus not a source of advantage. Finally, some resources can even be a source of disadvantage (Leonard-Barton 1992), meaning that they subtract from the overall firm's advantage. For example, in one of the restaurants an inexperienced bullying manager alienates front-of-the-house staff, detracting from the dining experience with a lack of coordination among servers, and thus reducing value creation.

Valuable and rare are the two conditions that determine whether a resource is a source of advantage. Additionally, if the resource is also difficult to imitate (i.e., competitors cannot use the same resource) and difficult to substitute (i.e., competitors cannot find alternative resources that provide similar services), the resource is considered to support a sustainable competitive advantage. Finally, if the resource is also appropriable (i.e., the firm controls the value created), then it supports a profitable, sustainable competitive advantage.

The resource-based view has commonly focused on the drivers of sustainability (difficult to imitate and substitute) rather than the basis of competitive advantage (valuable and rare). Most of the resource-based view literature has studied the sustainability of competitive advantage (D'Aveni et al. 2010), and how to reduce imitation and substitution of resources by competitors. To achieve this, firms can use causal ambiguity, whereby it is unclear how the firm achieves its outcomes (Lippman & Rumelt, 1982); complexity, whereby it is difficult to observe from the outside how the firm undertakes its activities (Rivkin, 2000); path dependencies and time compression diseconomies, whereby competitors need a long time to develop the same resources (Dierickx & Cool, 1989); or legal protection in the patent...

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