Knee deep in the big muddy: the survival of emerging market firms in developed markets.
| Verfasser | Miller, Stewart R. |
| Posten | RESEARCH ARTICLE |
Abstract and Key Results
* This study of Latin American banks located in the United States employs a resource-based framework to explain how subunits of emerging market firms can overcome the challenges of operating in a developed market.
* Our results show that an EMF subunit can draw upon ethnic identity as a valuable and costly-to-imitate resource to achieve competitive parity in the developed market.
* Ethnic resources can be generated not only from ethnically similar customers but also from ethnically similar competitors in the local market.
* In addition, the parent firm' level local and non-local resources can help to achieve competitive parity for the EMF subunits in that country, which in turn positively influences survival.
* However, over expansion can lead to spreading local and non-local resources too thin, thus adversely affecting survival.
Keywords: Resource-based View * Survival * Local Ethnic Density * Local Depth * Geographic Breadth. Emerging Market Firm * Banking
Introduction
When a firm expands across national borders, the principal hazard faced by its subunits is the liability of foreignness (Hymer 1960/1976, Mezias 2002, Nachum 2003, Zaheer 1995). Liability of foreignness is the sum of the social costs that arise from the unfamiliarity, relational and discriminatory hazards that foreign firms experience over and above those faced by local firms in the host country (Eden/Miller 2004). Because of liability of foreignness, subunits of multinationals entering a host country have a lower likelihood of surviving after entry into the new market.
To overcome the liability of foreignness, some scholars argue that multinational enterprises (MNEs) need to provide overseas subunits with certain firm-specific (home-based) resources, to enable survival and higher foreign subsidiary performance (e.g., Caves 1982, Mitchell/Shaver/Yeung, 1994, Rugman 1981, Shaver/Mitchell/Yeung 1997). These resource-based arguments for overcoming liability of foreignness are well suited for subunits of developed market firms, but their efficacy for subunits of emerging market firms (EMFs) remains unclear. Most EMFs that enter developed markets compete from a position of double disadvantage: The firms incur additional costs of doing business abroad, and in addition they are often resource poor compared to domestic firms in developed markets (Thomas/Eden/Hitt/Miller 2007). Although there are clear exceptions such as the Tata Group and Wipro from India, Embraer from Brazil, and Cemex from Mexico that have stronger resources than many of their developed market competitors (Bartlett/Ghoshal 2000, Khanna/Palepu 2006, Makino/Lau/Yeh 2002), the majority of EMFs have weaker marketing resources (e.g., brand recognition) and technology resources (e.g., fewer patents and copyrights) than most developed market firms. This weakness makes it difficult for EMF subunits to compete effectively by using a resource-exploitation strategy in developed markets (Dawar/Frost 1999, Hoskisson et al. 2000, Khanna/Palepu 1999).
In effect, emerging market firms entering developed markets start off "knee deep in the Big Muddy" or more likely waist or neck deep, to quote the old Pete Seeger song about an army platoon trying to cross the Mississippi River. Do these EMFs have the resources to "cross the river" and survive? Despite the double-disadvantage that exists (presented above), some EMF subunits do manage to survive and even prosper in developed markets. For example, Miami, Florida is host to many agencies of foreign-owned banks, such as Venezuelan-owned Commercebank. U.S. banking services with Latin America are derived not only from trade finance and private wealth, but also from active business investments in the United States. According to Fernando Capablanca, CEO of the Miami agency of Chile's Banco de Credito e Inversiones, "In the last few months at least three Chilean multinationals have settled here, primarily to handle their trade with the US and Europe." Referring to LanChile, the largest single foreign investment in Miami, Mr. Capablanca further noted that, "Eventually, what happens is that you have a lot of banks following these companies, because these are the banks' customers. When you get a few of them, you get a synergy." (Latin CEO: Executive Strategies for the Americas 2002).
Why and how emerging market firms can survive and be successful in developed markets poses an interesting conundrum for resource-based view scholars. We offer two possible answers to this conundrum, both of which revisit the notion that location is critical to organizational survival. First, we argue that an EMF subunit can draw upon ethnic identity as a valuable and costly-to-imitate resource to achieve competitive parity in the developed market. Ethnic resources can be generated not only from ethnically similar customers but also from ethnically similar competitors in the local market. Although ethnicity has been inferred as a driver of location choice in the agglomeration literature (Chang/Park 2005), scholars have been silent on its performance implications. The density dependence literature simply posits a curvilinear relationship between density and performance, assuming intense rivalry at high levels of density (Carroll/Hannan 1989, Hannan/Freeman 1977). However, this literature ignores the coopetition that can arise if a group of ethnically similar firms band together to combat local rivals ("us versus them") rather than compete against each other and it ignores pent-up demand. Our second insight into the conundrum is the role played by an EMF's resources within the host country. We argue that the parent firm's local and non-local resources can help to achieve competitive parity for the EMF subunits in that country, which in turn positively influences survival.
To test our framework, we examine the survival of Latin American banking subunits in the United States. Our dataset provides an appropriate test because it consists of banks headquartered in emerging market countries that share a common Hispanic culture and identity. Moreover, local market entry decisions are especially relevant to service firms because of the need to be located in close proximity to customers (Greve 2000, 2002). It is not uncommon for service firms such as banks to have multiple subunits in one or more local markets of a country. Prior studies have used the organizational learning and search literatures to explain that banks are more likely to establish subunits in local markets for which they have a presence and in neighboring markets (Greve 2000). We build on this earlier literature to examine the role ethnicity plays in the survival of foreign banking affiliates.
The objective of our study is to answer the question: To what extent do home-grown resources and host-country resources influence the survival o fan EMF subunit in a given location within a developed market? Our paper extends previous research in the following ways. First, our resource-based and organizational learning framework suggests that the value of a resource varies from EMF subunit to subunit within a country; as a result, the performance implications of a particular resource are idiosyncratic to each subunit. Second, our study extends Baum and Mezias (1992) and Miller and Eden (2006) by hypothesizing that foreign subunits can share a collective identity resource and therefore, as a group, they have a source of potential cooperative advantage relative to domestic firms that can enhance their ability to survive in developed markets. In our study, we differentiate home-grown resources, host-country local resources, and host-country non-local resources for a particular EMF subunit (because they affect the inter-organizational transfer of knowledge). In addition, we show that local depth (the extent of an MNE's presence in a local market of a host country) and geographic breadth (the extent of an MNE's non-local presence in a host country) each have curvilinear relationships with subunit survival, which builds on prior studies by Greve (2000) and Mitchell, Shaver, and Yeung (1992, 1993, 1994).
Some scholars posit that imitating the best-practicing local firms can reduce the liability of foreignness and improve performance (Kostova/Zaheer 1999). However, imitating best practices of local firms in developed markets is a difficult strategy to follow when the foreign entrant has fewer resources and is less efficient in exploiting its resource portfolio than domestic firms. Our application of ethnic identity to resource-based view thinking shows how EMFs can reduce the likelihood of "drowning" in developed markets (the "big muddy" for them). Ethnicity not only increases brand recognition and the ability to exploit the EMF's own resources, but may also improve access to local resources (e.g., employees, learning spillovers) that can be valuable and difficult to imitate or to substitute in specific market niches (Sirmon/Hitt/Ireland 2007). Lastly, the resource-based view has typically been employed to explain performance within an industry (Barney 1991). For many EMFs operating in developed markets, the goal is not necessarily to achieve above average returns, but rather to achieve competitive parity. To this end, we attempt to show that survival can be an appropriate measure of performance for these contexts.
Theory Development
Home-grown Resource: Ethnicity as a Collective Identity Resource
According to Nagel (1994, p. 152), "identity and culture are two of the basic building blocks of ethnicity", which he defines as "the product of actions undertaken by ethnic groups as they shape and reshape their self-definition and culture". Identity and culture are important to establishing boundaries and producing meaning. Ethnic boundaries determine who is and is not a member of a group. Ethnic identity therefore represents a specific form of collective identity or group identity (Ashforth/Mael 1989).
While...
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