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Home-region orientation in international expansion strategies

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Abstract

Despite the emerging consensus that most multinational enterprises (MNEs) are regional, systematic theory explaining regionalization is conspicuously absent, and empirical findings on its implications for MNE performance remain mixed. Drawing on internalization theory, we suggest that technological advantage and institutional diversity determine firms’ home-region orientation (HRO), and we posit a simultaneous relationship between HRO and performance. We apply insights from the firm heterogeneity literature of international trade to explain the influence of technology on HRO. We predict a negative and nonlinear impact of technological advantage on HRO driven by increasing returns logic, and a negative impact of institutional diversity on HRO driven by search and deliberation costs. We find empirical support for our model using simultaneous equations methodology on longitudinal data on Triad-based MNEs. Performance significantly reduces HRO, but HRO does not have a significant effect on performance.

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Notes

  1. Despite the wide use of the term “geographic scope”, it has not been well defined in the literature. Geographic scope can refer to the extent, dispersion, and diversity of the foreign markets that a firm expands into. A firm's geographic scope is a cumulative effect of its locational choices (Hennart, 2011). Some studies use it synonymously with degree of internationalization; others use entropy measures to include the dispersion and diversity dimensions (Goerzen & Beamish, 2003; Hitt et al., 1997; Lu & Beamish, 2004; Tallman & Li, 1996). Until Rugman and associates’ work, most of the work had not differentiated between near and far geographic activities, as the literature's primary focus had been on domestic vs foreign markets.

  2. Dunning (1998) pointed out that location remained a neglected issue in IB research, and a decade later, when Dunning's article received the JIBS Decade Award, Cantwell (2009) gave a reminder that the issue still persisted.

  3. We are grateful to our anonymous reviewers, who gently nudged us to stay neutral and consistent with the established terminology in the regionalization literature.

  4. If T is the total sales of an MNE, D is the domestic sales, F is the foreign sales, and R is the sales within the home region, and G is the sales outside the home region, then our measures r1 and r2 for regionalization can be represented as: r1=(R−D)/F and r2=(R−D)/T−G/T. Note that T=D+F, F=(R−D)+G, and r1 and r2 are highly correlated.

  5. Arthur (1996) also worked on increasing returns from a technology competition perspective, focusing on standards and lock-in, and assuming increasing returns conferred by a combination of the impact of economies of scale, network externalities, and switching costs. Romer (1986: 1002), in his work on long-run growth models, assumed that knowledge is an input “that has increasing marginal productivity”.

  6. Based on authors’ calculations using World Bank data.

  7. For more details, please refer to: http://www.freetheworld.com/datasets_efw.html.

  8. We are grateful for the two anonymous reviewers for suggesting some of these robustness tests.

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Acknowledgements

We are grateful for the invaluable feedback from the editor, Professor Ulf Andersson, and from three anonymous reviewers, which has sharpened our contribution here. We thank our colleagues who have helped us significantly: Christian Asmussen, Paul Beamish, Allan Bird, Cyril Bouquet, Anthony Goerzen, Shyam Kumar, Harry Lane, Dan Li, Marjorie Lyles, Simon Parker, Ravi Ramamurti, Subramanian Rangan, Alan Rugman, K. Sivakumar, Alain Verbeke, and the participants at the research workshops at BEPP department at Indiana University, Haskayne School of Business at the University of Calgary, IB&S group at Northeastern University, and strategy department at Boston College. The first author acknowledges the support from the Northeastern University's Gary Gregg Research Fellowship and the second author acknowledges the support from the Indiana University's Schmenner Faculty Fellowship for enabling this research.

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Authors and Affiliations

  1. International Business & Strategy Group, D’Amore-McKim School of Business, Northeastern University, Boston, USA

    Elitsa R Banalieva

  2. Kelley School of Business, Indiana University, Indianapolis, USA

    Charles Dhanaraj

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  1. Elitsa R Banalieva
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  2. Charles Dhanaraj
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Correspondence to Charles Dhanaraj.

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Accepted by Ulf Andersson, Area Editor, 7 October 2012. This paper has been with the authors for two revisions.

Appendices

APPENDIX A

Table A1

Table A1 Description of the BERI Index
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APPENDIX B

Table B1

Table B1 Description of the Fraser index
Full size table

APPENDIX C

Table C1

Table C1 United Nations’ country groupings
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Banalieva, E., Dhanaraj, C. Home-region orientation in international expansion strategies. J Int Bus Stud 44, 89–116 (2013). https://doi.org/10.1057/jibs.2012.33

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