Market size, legal institutions, and international diversification strategies: implications for the performance of multinational firms.
| Verfasser | Li, Jiatao |
| Posten | RESEARCH ARTICLE |
Abstract and Key Results
* 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.
Keywords: Diversification Strategies * Firm Performance * Home Country * Market * Institutions
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), they recognized the varying munificence of different home country environments, especially factors that facilitate transformational activities and institutions that foster transactional activities. Their study of firms from six Western European countries showed that home country environment is indeed an important determinant of corporate diversification strategies and performance.
Wan and Hoskisson's (2003) results suggest two research questions which are the foci of this study: How do country-level market and institutional factors affect a multinational corporation (MNC)'s diversification strategies? And how does the diversification-performance link vary across national settings? Specifically, this study centers on the influence of domestic market size and legal institutions on the geographic diversification strategies of multinationals from different home countries. These two antecedents were selected in an attempt to capture the economic and societal aspects of any opportunity set provided by the home country environment (Arora/Gambardella 1997, La Porta et al. 1997, 1998, Porter 1990). Meanwhile, it is generally agreed that international expansion is an important growth strategy for multinationals (Buhner 1987, Delios/Beamish 1999, Hitt/Hoskisson/Kim 1997, Tallman/Li 1996). Research has shown that it plays a vital role in determining firm performance and international competitiveness (e.g., Geringer/ Beamish/da Costa 1989, Hitt/Hoskisson/Kim 1997, Wan/Hoskisson 2003). Therefore, this study also explores the performance outcomes of international diversification strategy to elucidate the moderating effects of domestic country environment.
This study is organized as follows. The theoretical arguments underlying country differences in firm strategies will be reviewed. Hypotheses concerning country-level influences on MNC international diversification strategies will then be developed. The following sections introduce the data employed and statistical analysis. The final two sections discuss the key findings and their implications.
Country Effects on Corporate Diversification and Performance
The antecedents which lead firms to choose specific diversification strategies and the performance outcomes of those strategies are two core issues in the study of corporate diversification. Findings from previous research suggest that firms may diversify into new markets to reap synergistic benefits (e.g., Rumelt 1974), to reduce overall risk exposure (e.g., Smith/Cooper 1988), to minimize transaction costs (e.g., Buckley/Casson 1976), or to exploit economies of scale relative to firms in foreign countries (e.g., Hymer 1960). Diversification often generates economies of scope in the use of resources (Barney 1991, Prahalad/Hamel 1990), and may improve a firm's return on resource investments while stabilizing cash flow (Kim/Hwang/Burgers 1993). However, diversification also raises governance costs and can thus reduce profits (Jones/Hill 1988). Most previous studies along this line have either focused on firms from a single home country (Makino/Isobe/ Chan 2004) or have assumed homogeneity of strategy and structure across firms if multiple home countries were included (Fladmoe-Lindquist/Tallman 1994). These studies have generally paid insufficient attention to the effects of domestic country environments on international strategic choices.
However, some studies have delved into this issue, investigating the influences of domestic country markets and institutions on corporate diversification (e.g., Kogut et al. 2002, Wan 2005) and diversification-performance linkages across countries (e.g., Makino et al. 2004, Wan/Hoskisson 2003). For instance, Kogut, Walker, and Anand (2002) analyzed the diversification patterns of large corporations from five developed economies. The convergence of organizational forms in diverse national settings has been a fundamental theme in comparative cross-country studies, but their results indicated a remarkable divergence in these patterns. They interpreted such institutional variations in terms of the unique interplay of agency and institutions in the context of structurally dictated opportunities for entrepreneurship. They concluded that entrepreneurial diversification decisions are "... neither the outcome of technically given factors nor pressures toward conformity, but a product of reflective actors constrained and enabled by their access to authority, resources, and structural opportunities" (2002, p. 163). From this perspective, if diversification across industries is subject to nation-specific governance and resource constraints, then countries should vary widely in their inter-industry diversification patterns. Given the fixity of certain institutions, even if countries are subject to the pressure of globalization, convergence in diversification patterns is not necessarily to be expected.
In another study, Wan and Hoskisson (2003) compared national environments to examine the relationship between corporate diversification strategies and firm performance. Their results suggest that these relationships hinge on differences in home country environments. Wan and Hoskisson defined the "munificence" of a home country environment in terms of factors, such as physical infrastructure, that are used for transformational activities, and institutions, such as judiciary efficiency, that facilitate transactions. Factors may be endowed factors such as natural resources, advanced factors such as physical infrastructure, or human factors (particularly labor abundance), but they are mostly tangible in nature. In contrast, institutions might be political (bureaucratic infrastructure), legal (formal rules) or societal (general norms), but they are generally less tangible than factors. A national environment's opportunity set is determined by its production factors and institutions, and firms seek profitable opportunities in the context of the opportunity set (North 1990). Because opportunity sets differ across countries, firms' optimal actions diverge accordingly. In their study, Wan and Hoskisson showed that international diversification aimed at improving competitiveness at home is positively related to firm performance in less munificent home country environments.
These insights complement the resource-based view (RBV) of the firm...
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