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Elitsa (Ellie) R. Banalieva Northeastern University Charles Dhanaraj Indiana University
HOME REGION ORIENTATION IN INTERNATIONAL EXPANSION STRATEGIES Elitsa (Ellie) R. Banalieva Assistant Professor Gary Gregg Research Fellow International Business & Strategy Group College of Business Administration Northeastern University Boston, MA 02115-5000 Phone: 617-373-4756 Fax: 617-373-8628 Email: email@example.com
Charles Dhanaraj* Associate Professor of Management Schmenner Faculty Fellow Kelley School of Business Indiana University 801 West Michigan Street Indianapolis, IN 46202-5151 Phone: 317-274-5694 Fax: 317-274-3312 Email: firstname.lastname@example.org
Forthcoming 2013 Journal of International Business Studies
We are grateful for the invaluable feedback from the editor, Professor Ulf Andersson, and three anonymous reviewers, which have 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.
HOME REGION ORIENTATION IN INTERNATIONAL EXPANSION STRATEGIES
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 non-linear 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 of Triadbased MNEs. Performance significantly reduces HRO, but HRO does not have a significant effect on performance.
Keywords: Internalization theory; geographic scope; home region orientation; technological advantage; regionalization debate; institutional diversity; performance; simultaneous equations methodology
Running Head: Home Region Orientation
“Internal inducements to growth are not by themselves profitable opportunities for expansion nor are external inducements by themselves.” Penrose (1995: 87) INTRODUCTION How do multinational enterprises (MNEs) determine their geographic scope1? This is a central concern for international business (IB) research. Yet, ironically the literature has long remained silent regarding the nuances of location in international expansion2. Simply put, should MNEs focus on markets close to their home country (i.e., regional), or far from home (i.e., global)? There has been an implicit assumption that firms expand globally, accelerated by growing technology, transportation, and trade links across the world (Ghoshal, 1987; Levitt, 1983; Yip, 1992), and popular books have reinforced this notion (Cairncross, 2001; Friedman, 1999, 2005). Rugman and Verbeke (2004), in their iconoclastic study of the Fortune Global 500 firms, argued that most firms are not global, but regional; i.e., they limit their geographic scope to their home region. Ghemawat (2007) independently reported corroborating findings that the exorbitant cost of operating at a distance (cultural, administrative, geographic, or economic) between the home and host countries had led to a state of “semi-globalization.” Propelled by this provocative insight, a number of recent studies explore the nuances of geographic scope and a consensus is emerging that most MNEs are regional. Yet, systematic theory explaining regionalization is conspicuously absent and empirical findings on its implications for MNE performance remain mixed. We focus our research on two related questions. Why do MNEs limit their geographic scope to their home region? How does this affect MNE performance? Our research interest is driven by the pressing need to explore the conceptual logic underpinning the limits of firms’ geographic scope. As Osegowitsch and Sammartino (2007: 46) note, “[t]he IB community needs to urgently confront the
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, Hoskisson, & Kim, 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.
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) reminded that the issue still persisted.
question why, in an age of purported globalization, many of the world’s largest firms appear to have barely ventured beyond the confines of their home region.” In undertaking such an endeavor, we recognize the endemic constraints posed by the limited availability of publicly available data since existing regulations do not mandate disclosure of fine-grained data such as sales across geographic segments (Herrmann & Thomas, 1996). Even when firms report segment sales, they define geographic segments in an idiosyncratic manner, making comparison across firms difficult (Rugman & Verbeke, 2007). Our goal in this paper is to advance the field’s understanding of the regionalization phenomenon. We make the best use of available data by adopting a parsimonious “near/far” bimodal approach to geographic scope. We recognize that such an approach does not explain everything. However, simplifying the frame can lead to conceptually interesting and empirically tractable questions. In developing our conceptual framework, we use the term “home region orientation” (HRO) (Delios & Beamish, 2005; Rugman & Verbeke, 2008). Broadly, HRO is the propensity of a firm to expand within the home region as opposed to outside the home region, allowing us to systematically theorize on the strategic choices faced by the firm and its motivations for these location choices. Over time, HRO drives the expansion strategies of a firm and, thus, dictates a firm’s geographic scope. Although the international finance (French & Poterba, 1991; Tesar & Werner, 1998) and international trade literatures (Hejazi 2005; McCallum, 1995) have used the term “home bias” to describe the geographic concentration of portfolio and trade activities of investors and countries, respectively, we refrain from using the term “bias” as it signals an a priori negative connotation of the phenomenon 3. Technological advantage and institutional environment are the two dominant explanatory constructs in the IB literature in general, and in the internalization theory in particular (Buckley & Casson, 1976; Rugman, 1981). In this study, we build on internalization theory to investigate how these two constructs determine a firm’s geographic scope. We integrate the increasing returns mechanism central to the technology literature (Arthur, 1989; Ciuriak et al., 2011; Helpman, 2006; Helpman, Melitz
We are grateful to our anonymous reviewers who gently nudged us to stay neutral and consistent with the established terminology in the regionalization literature. 3
& Yeaple, 2004; Krugman, 1979; Melitz, 2003; Nocke & Yeaple, 2007) with the notion of firm-specific advantage (FSA) central to the IB literature (Buckley & Casson, 1976; Rugman, 1981) to propose a negative and non-linear relationship between technological advantage and HRO. We analyze how institutional diversity within the home region can influence the search and deliberation costs for an MNE and, thus, affect its HRO (Goerzen & Beamish, 2003; Rangan, 2000). While most of the extant work has attempted to detect the impact of HRO on firm performance (see Qian et al., 2010 for an overview), we build a simultaneous equations model focusing on how performance and HRO jointly affect each other. Our research design uses longitudinal data on 625 Triad-based (USA, Western Europe, and Japan) public MNEs between 1997 and 2006 and controls for a wide range of alternative explanations. We contribute to the IB literature in three ways. First, we provide a parsimonious model of how technology and environment shape firms’ geographic scope. While technological advantage has been well-recognized as a critical factor determining firms’ overall internationalization and the entry modes (see Kirca et al., 2011 for an overview), its relevance to HRO is less apparent. In particular, our negative nonlinear hypothesis of the effect of technological advantage on HRO is novel and builds on the firm heterogeneity literature (Melitz, 2003; Nocke & Yeaple, 2007). Also, the variance approach that we adopt in our regional institutional diversity hypothesis sheds new light on why some firms would avoid their home region despite the proximity. Second, our comprehensive database allows us to test the generalizability of regionalization patterns that Rugman and Verbeke (2004, 2008) observed using the Fortune 500 Global data. Our longitudinal data are drawn from a large database of firms from the United States, Japan, and Western Europe. Finally, our simultaneous equations model provides an insight into the complex HRO-performance relationship, and can explain the inconsistent empirical findings on the impact of regionalization on performance. We first synthesize three debates within the regionalization literature. We then present our conceptual framework, followed by our research design. Finally, we discuss the implications of our findings and conclude with a summary of our contributions and ideas for future research.
GEOGRAPHIC SCOPE IN INTERNATIONAL BUSINESS RESEARCH Two complementary streams of literature have been invoked in explaining firms’ geographic scope: the Uppsala internationalization process model (Johanson & Vahlne, 1977) and the Penrosian capability model (Penrose, 1995). The process model of internationalization posits that MNEs internationalize incrementally from familiar and proximate to new and distant locations, increasing their commitment to foreign locations in small steps as they learn about these new markets. This minimizes the uncertainty inherent in unfamiliar markets and the complexity of engaging with partners embedded in local networks (Barkema, Bell, & Pennings, 1996; Benito & Gripsrud, 1992; Johanson & Vahlne, 1977; 2009). Hence, MNEs start as home-regionally oriented and gradually adjust their international expansion toward more distant global locations. The Penrosian perspective (Penrose, 1995) complements this learning model by emphasizing the growing constraint in managerial resources as MNEs expand internationally. Managerial attention that can be devoted to complexities of internationalization is scarce and, accordingly, MNEs are likely to deploy their attention to proximal and familiar opportunities to minimize the cost of dynamic adjustment, thus favoring a regional strategy (Hutzschenreuter, Voll, & Verbeke, 2011; Meyer, 2006; Tan & Mahoney, 2005). Rugman (2000) formalized the regionalization hypothesis in his book, provocatively titled “The End of Globalization: Why Global Strategy Is a Myth & How to Profit from the Realities of Regional Markets”. Rugman’s (2000) ingenuity was to present a coruscating insight from simple hand-coded data on the geographic distribution of sales, overlooked by most scholars (for exceptions, see Hitt et al., 1997). Researchers in other disciplines have made similar observations. For instance, portfolio research in finance has observed that U.S. investors tend to hold more than 90% of their equity wealth in U.S. assets and Japanese investors tend to hold roughly 98% of their assets at home (French & Poterba, 1991; Tesar & Werner, 1998). The international trade literature has observed that intra-regional trade is substantially larger than inter-regional trade (Hejazi, 2005; McCallum, 1995). In the strategic management literature, studies found that diverse industry standards, demand for local differentiation, and the complexity of
global operations drove businesses to focus regionally (Douglas & Wind, 1987; Morrison, Ricks, & Roth, 1991; Roth & Morrison, 1992). “Regionalism rules” (Ethier, 1998: 1214), but popular media and even scholarly research have perpetuated the assumption of an integrated global marketplace, leading Ghemawat (2007: 1) to question, “why—if at all—firms should globalize in a world where distance still matters.” A decade of research on regionalization has amassed significant empirical evidence for it, and has refined the methodology and sharpened the focus of inquiry. Figure 1 synthesizes the evolution of this research. In essence, this stream posits that there are limits to geographic scope, contrary to the implicit premise in global strategy research and the ubiquitous “global” claims of CEOs (Bartlett & Ghoshal, 1989; Levitt, 1983; Rugman, 2000). The development in regionalization research is best captured by three debates that have invigorated the stream for a decade, namely, how to define a “region”, how to measure regionalization, and how home region orientation matters to firm performance. ***Insert Figure 1 Here*** 1. Definition of “Region”: While regionalization has been documented as an important emerging theme for future IB research (Griffith, Cavusgil, & Xu, 2008), there is little consensus on how to operationalize a region (see Figure 1). Rugman and associates’ original conceptualization of the Triad followed Ohmae’s (1985) work. Flores and Aguilera (2007) show, through a longitudinal study, that the growing recent number of investments outside the core Triad markets demands a more fine-grained regional specification. Dunning, Fujita, and Yakova (2007), using macro data of foreign direct investment (FDI), confirm the broad regional patterns, with regions defined by culture clusters. Sensitivity studies (Aguilera, Flores, & Vaaler, 2007; Vaaler, Aguilera, & Flores, 2007) suggest that differing approaches using cultural, political, economic, or geographic distances to grouping countries can affect the conclusions about the regionalization patterns. Arregle, Beamish, and Hebert (2009) defined regions in geographic terms as “a grouping of countries with physical continuity and proximity,” building on the premise that “physical immediacy is a precondition for a sense of unity or shared properties” (Aguilera et al., 2007: 8).
We follow this geographic definition of a region for several reasons. First, geographic proximity is central to how MNEs organize their international strategy (Buckley & Ghauri, 2004) because it leads to greater trade and investment linkages (Ghemawat, 2007). Second, the geographic proximity approach is timeinvariant, “which might provide an advantage over other regional schemes” (Aguilera et al., 2007: 9). Third, while sophisticated regional classifications based on culture or other considerations are valuable, they are less useful when the focus of the research is on international corporate strategy because they are “an academic artifact, intellectually appealing but relatively far removed from the practice of international corporate strategy and geo-political reality” (Rugman & Verbeke, 2007: 203). 2. Measures of Regionalization: In their early studies, Rugman and associates advocated for the use of the home region sales-divided by-total sales ratio, with the home region sales including the domestic sales, as a useful measure of firms’ regionalization (Rugman, 2000, 2005; Rugman & Verbeke, 2004). The authors used thresholds to classify firms into regional, bi-regional, and global (Rugman & Verbeke, 2004). Recent research, however, criticized the thresholds as arbitrary and suggested that the regionalization hypothesis also needs to be tested longitudinally (Osegowitsch & Sammartino, 2008). Studies also noted that including domestic sales in measuring regionalization overstates the degree of regionalization (Delios & Beamish, 2005; Li, 2005). Two alternative measures of regionalization that have emerged take into account domestic market sales, while also isolating the effect of the international rest of home region: first, rest of home region sales-to-foreign sales ratio (Banalieva & Eddleston, 2011; Delios & Beamish, 2005; Li, 2005; Rugman & Verbeke, 2008), and second, rest of home region sales-tototal sales ratio (Elango, 2004; Rugman & Verbeke, 2008). Asmussen (2009) suggests a measure normalizing the ratios using GDP data, but the measure has little practical appeal. We use two alternative measures for HRO 4. The first measure uses the ratio of rest of home region sales-to-foreign sales (Delios & Beamish, 2005; Rugman & Verbeke, 2008). The second is the ratio of rest of home region sales-to-total
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.
sales minus the ratio of global sales-to-total sales (Asmussen, 2009; Elango, 2004; Rugman & Verbeke, 2008). 3. Regionalization and Performance: Although Rugman (2000, 2005) and Rugman and Verbeke’s (2004) original work did not assume the implications of regionalization on performance, several followup studies have explored this question, yielding mixed results. While some studies have found a positive effect of HRO on performance (Qian et al., 2010; Rugman et al., 2007), other studies have found a negative effect (Delios & Beamish, 2005; Elango, 2004), and more recent studies have advanced contingency perspectives (Banalieva & Eddleston, 2011; Li, 2005). Delios and Beamish (2005), in an exploratory study, found that home region-oriented Japanese MNEs were the worst performers in the sample. Similarly, Elango (2004) theorized a positive HRO-performance relationship but instead found that a greater HRO reduces performance, although not significantly so, for a set of worldwide MNEs. These results have raised an interesting but underexplored question: “why is the home-oriented multinational firm … so prevalent overall when its performance is the lowest in the sample?” (Delios & Beamish, 2005: 30). None of these studies have explored the simultaneous effect of performance on HRO. A firm’s strategy and its risk-taking behavior can be constrained by its performance. It is possible that underperforming firms lack the financial resources to expand beyond the home region so they are home region oriented. Thus, we explore the simultaneous relationship between HRO and performance to get a better understanding of the direction of causality between performance and HRO. THEORY DEVELOPMENT Internalization theory (Buckley & Casson 1976; Rugman 1981) suggests that market imperfections—structural or transaction-specific—raise the transaction costs across national borders and lead to internalization of markets and the creation of MNEs (Hennart, 2007: 428). Internalization eliminates buyer uncertainty and haggling costs, bypasses government intervention through transfer pricing, and allows for the use of discriminatory pricing based on market conditions; these benefits can outweigh the administrative and coordination costs of internalization (Rugman, 1981). This has emerged
as a general theory to explain MNEs’ foreign expansion (Buckley & Casson, 1976; 2009; Rugman, 1981) and provides significant insights into firms’ geographic scope. The theory builds on two core constructs: non-location bound FSAs, which create an edge for the MNE in a foreign country, and the institutional environment, which determines the costs of exploiting the FSAs (Rugman & Verbeke, 2008). We theorize a negative, non-linear effect of technological advantage and a negative effect of institutional diversity within the home region on HRO, and argue for a simultaneous relationship between HRO and performance. Figure 2 synthesizes our conceptual framework. *** Insert Figure 2 Here *** Technological Advantage Technological advantage refers to the proprietary knowledge developed by an MNE through R&D or otherwise and embodied in the firm’s processes and products. It is regarded as the most valuable asset MNEs own (Caves, 1996; Dunning, 1980). Technological advantage is “the most commonly used proxy variable in the literature to denote the existence of internalization advantage, implying that high degrees of R&D intensity indicate the presence of intangible assets that lead to competitive advantage in international markets” (Kirca et al., 2011: 32). It is also a non-location-bound FSA that propagates firms globally (Anand & Delios, 2002; Meyer, Wright, & Pruthi, 2009; Nocke & Yeaple, 2007; Rugman & Verbeke, 2008). Rugman and Verbeke (2008: 4060) note that “MNEs can penetrate foreign markets only if they can build upon non-location bound FSAs, transferable and deployable in a profitable fashion in host environments.” While the relationship between technological advantage and overall
internationalization is well-established (Kirca et al., 2011), few studies have analyzed how technological advantage can influence the firms’ distance of international expansion, i.e., HRO (Cerrato, 2009). Firm-specific technological advantage is a key variable in the “new” new trade literature as well (Melitz, 2003; Nocke & Yeaple, 2007). In contrast to the earlier new trade literature where HeckscherOhlin models assumed trade gains arose at the country- or sector-level of analysis with countries operating under constant returns to scale and with the same production technology, the “new” new trade
theory adopts a firm level of analysis and embeds firm-level heterogeneity within Krugman’s (1980) model of trade under monopolistic competition and increasing returns (see Ciuriak et al., 2011; Greenaway & Kneller, 2007 for an overview). Increasing returns, characterized by “the tendency for that which is ahead to get even farther ahead” 5 (Arthur, 1996; Helpman & Krugman, 1985; Krugman, 1980; Romer, 1986), embodies the notion that as the technological advantage grows, it has an increasingly larger impact on the competitive advantage of the firm. Krugman (1979) invoked the increasing returns argument to integrate consumers’ preferences for product diversity and producers’ preferences for economies of scale, and showed that countries with a larger demand for a product produced a more-thanproportionate share of that product. By incorporating firm-level heterogeneity along with increasing returns, the “new” new trade theory aligns well with the empirical reality that only a few firms participate in foreign markets and those that do export tend to do so by using newer technologies that would allow them to overcome the large costs of foreign expansion (Ciuriak et al., 2011; Helpman, 2006; Helpman et al., 2004; Melitz, 2003; Nocke & Yeaple, 2007). While Melitz (2003) and Helpman et al. (2004) treat firm-level capabilities as a bundle, Nocke and Yeaple (2007) distinguish technological advantage, which has mobility across geographic borders, from marketing advantage, which lacks such mobility. This “new” new trade theory has integrated exports and FDI seamlessly, and has invoked technological advantage as a core determinant of firms’ international activity. This is also confirmed by empirical studies on firm heterogeneity that have focused on determinants and effects of exporting (e.g., Bernard, Eaton, Jensen & Kortum, 2003; Bernard & Jensen, 1999; 2004; Bernard, Jensen & Schott, 2006). Drawing on this research, we argue that technology confers competitive advantage for a firm to access global markets and overcome the challenges of increasing distance from the home market, particularly in three areas: diversity of technology standards, demand for differentiation, and global complexity of management (Douglas & Wind, 1987; Morrison et al., 1991; Roth & Morrison, 1992). We
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.” 10
describe these three mechanisms next, incorporating insights from the firm heterogeneity literature. First, with increasing technological advantage, the fungibility of the proprietary assets of the firm across geographic borders and the marginal productivity of technology increase at an increasing rate (Melitz, 2003; Nocke & Yeaple, 2007). When technology sophistication is low, technological knowledge tends to be simpler and generic, and firms imitate each other’s technologies or even purchase technologies from third parties (Hashai & Almor, 2008). This increases the threat of imitability and renders an insufficient technological advantage for firms to expand beyond their familiar home regions (Douglas & Wind, 1987). However, as technological sophistication increases, the MNE grows increasingly into a standard-setter rather than a standard-taker and the degree of adaptation to new and geographically distant markets decreases at an increasing rate (Bernard & Jensen, 1999; Nocke & Yeaple, 2007). As technological sophistication grows, it becomes increasingly manageable for the firm to penetrate farther into more distant global markets and dislodge global rivals there, as the firms lock-in global consumers to the firms’ own technology standards. For instance, sophisticated technologies can “eventually corner the market of potential adopters, with the other technologies becoming locked out” (Arthur, 1989: 116). Second, technology leaders become trail blazers as they set new trends for other firms to follow (Arthur, 1989, 1996; Nocke & Yeaple, 2007). The proprietary knowledge gives the firm “the resources and competitiveness to expand in all regions and to benefit from the scale economies of a global plant configuration” (Belderbos & Sleuwaegen, 2005: 579). When technological advantage is low, the MNEs are forced to fight against the local competition from both domestic incumbents and foreign MNEs. In such cases, an MNE’s foreignness is a liability because the MNE with low technological advantage is unable to match the technology efforts of its rivals and is likely to face eroding global, but accelerating regional market presence (Autio, Sapienza, & Almeida, 2000). However, rising levels of technological advantage increasingly enhance the MNEs’ ability to combine their knowledge on a global scale, find more efficient global distribution channels, and reduce the high costs of new product development (Zahra, Ireland, & Hitt, 2000). Thus, as technological advantage increases, the MNE becomes less burdened with cost and instead begins to enjoy a premium pricing advantage at an increasing rate (Helpman et al., 2004;
Melitz, 2003). Additionally, the capacity to penetrate geographically distant markets increases disproportionately, with Levitt’s ‘global market’ becoming a closer reality. Third, increasing technological advantage accelerates the productivity of managerial attention in international expansion at an increasing rate (Bouquet, Morrison, & Birkinshaw, 2009; Bouquet & Birkinshaw, 2011). As technological advantage increases, productivity of the firm’s resources also increases more than proportionately (Griliches, 1986; Hansen & Wernerfelt, 1989; Henderson & Cockburn, 2000). Penrose (1995) emphasized executive management is a key resource that is necessary, but often limiting for the growth of a firm. Managerial attention for international expansion is “the time and effort that headquarter executives invest in activities, communications, and discussions aimed at improving their understanding of the global marketplace” (Bouquet & Birkinshaw, 2011: 244). It allows executives to stay abreast of ongoing international expansion opportunities and respond accordingly with informed strategic actions. As technological advantage increases, organizational costs of coordination across the markets decrease at an increasing rate and, hence, firms would be able to reach Levitt’s world of globalized markets rapidly. The increasing ability of the firm to lock in global consumers would also lower the managerial complexity at an increasing rate. Concurrently, as the capacity of the firm to penetrate distant markets increases at an increasing rate, a firm’s HRO decreases more than proportionately. A combination of these increasing returns in technology’s fungibility, market power, and managerial productivity leads to: Hypothesis 1: Ceteris paribus, for an internationalizing MNE, as technological advantage increases, home region orientation decreases at an increasing rate. Institutional Diversity MNEs operate in diverse institutional environments (Kostova & Roth, 2002; Rosenzweig & Singh, 1991). In the IB literature, two approaches, political economy and socio-cultural, have been used to study institutional environments. The political economy stream emphasizes the risk and complexity of investing in a country arising from its regulatory policy and uses variables such as political risk, political hazard, formal (regulatory, legal, administrative, economic, and geographic) institutional distance,
political predictability, and restrictiveness (Abdi & Aulakh, 2012; Boddewyn, 1988; Campbell, Eden, & Miller, 2012; Gomes-Casseres, 1990; Henisz, 2000; Salomon & Wu, 2012). The socio-cultural stream emphasizes the sociological/behavioral similarity (or distance) between informal rules of the home and host country cultures, often captured with psychic or cultural distance (Abdi & Aulakh, 2012; Campbell et al., 2012; Hofstede, 1980; Johanson & Vahlne, 1977; Kogut & Singh, 1988). Recent works have attempted to integrate these approaches using institutional distance (Abdi & Aulakh, 2012; Berry, Guillen, & Zhou, 2010; Campbell et al., 2012; Kostova & Roth, 2002; Salomon & Wu, 2012; Slangen & Beugelsdijk, 2010; Xu & Shenkar, 2002). Berry et al. (2010) provide a comprehensive analysis of various types of institutional distance and their influence on firms’ foreign entry decisions. Broadly, this literature suggests that MNEs “prefer to locate foreign operations in host countries that are more ‘proximate/similar’ to their home country” (Flores & Aguilera, 2007: 7). Distance measures are helpful for dyadic (i.e., home-host country) analysis. However, given our focus is on a regional level of analysis, i.e., HRO, a regional institutional diversity construct becomes more appropriate (Goerzen & Beamish, 2003) because “[f]irms’ international strategy is set not only on a country-by-country basis… regional considerations play an important role” as well (Arregle et al., 2009: 104). Institutional diversity at the regional level is the variation in the institutional environments across the countries within the home region. Unfortunately, “IB research has devoted surprisingly little attention to comparing the topography of institutional landscapes and understanding their diversity” (Jackson & Deeg, 2008). Institutional context is a critical factor in internalization costs as “institutions directly determine what arrows a firm has in its quiver as it struggles to formulate and implement strategy and to create competitive advantage” (Ingram & Silverman, 2002: 20). Institutional diversity increases the risk for the decision making process and raises transaction costs (Kostova & Zaheer, 1999). New contexts demand higher information processing and coordination costs, and increase the complexity of learning how to maneuver through these diverse countries (Hitt et al., 1997; Kostova & Zaheer, 1999).
Furthermore, MNEs, in pursuing new economic opportunities in foreign countries, “engage in a process of search and deliberation” (Rangan, 2000: 206). Firms incur search costs during the identification of potential exchange partners and deliberation costs during their assessment of the capability and reliability of these partners (Rangan, 2000). Incorporating the search and deliberation costs into the analysis allows us to make an important extension to prior institutional research. Namely, while spatial proximity can reduce the search costs, the institutional commonality across the partners within the home region can minimize the deliberation costs. As Rangan (2000: 207) notes, search and deliberation are “additive to the purchase price.” Internalization theory suggests that firms minimize both. Institutional diversity is important not only at entry, but all through the life of the MNE. For instance, governance hazards like expropriation risk of assets at less than full market value, constraints on the pursuit of business opportunities because of weak enforcement of contracts, liquidity risk caused by local customers delaying or avoiding payments, etc. can create havoc not only in one particular country operation but at the regional network level as well (Zhou & Poppo, 2010). As the variance across the institutional environments within the home region decreases, firms can exploit valuable knowledge created or learned in one country within the home region to another country within the home region, what Bartlett and Ghoshal refer to as “worldwide learning,” to create competitive advantage (Chan, Isobe, & Makino, 2008). While explicit contracts with suppliers, distributors, and partners can work in some countries within the home region due to their market-based institutions (Zhou & Poppo, 2010), they may be futile in countries within the home region with less market-based institutional frameworks, which tend to be characterized by a greater degree of asymmetric information and, hence, risk for a home-regionally oriented company (Chan et al., 2008). These arguments suggest that spatial proximity is a natural driver for firms to consider home region markets. However, as regional institutional diversity increases, firms will find alternative global markets more attractive to avoid the growing regional institutional complexity: Hypothesis 2: For an internationalizing MNE, the greater the institutional diversity of its home region, the lower the firm’s home region orientation.
The HRO-Performance Relationship As discussed earlier, we advance a model incorporating a simultaneous relationship between HRO and performance. We first advance the effect of performance on HRO in hypothesis 3, followed by the effect of HRO on performance in hypothesis 4. The impact of performance on HRO. As an MNE’s resources and slack are conditioned by its performance, its willingness to take risk in new markets will be influenced by firm performance. First, greater firm profitability suggests that the firm has access to increased wealth or slack resources that can help the firm grow and allow it to penetrate new, less familiar markets (Fiegenbaum, Shaver, & Yeung, 1997; Nohria & Gulati, 1996; Penrose, 1959). Organizational theorists have suggested that such residual resources are necessary for flexibility and growth as they provide a cushion to absorb unexpected shocks and allow firms to take risks in market expansion (Bromiley, 1991; Nohria & Gulati, 1996). Thus, increased firm profitability provides a buffer to store resources and deploy them in situations of temporary downturns or difficult competitive circumstances. When a firm performs well, it can afford to experiment more with new and riskier strategies that can generate greater returns (Tseng et al., 2007). Global strategy has been associated with higher risk compared to regional strategy (Elango, 2004; Li, 2005). Thus, a better performance could lead to greater global scope and a lower HRO. Second, a greater availability of wealth obtained from higher performance would also render the managers of the organization more inclined to take strategic risks in search of new growth opportunities (Bromiley, 1991). Researchers have long associated higher levels of a firm’s financial wealth with a greater degree of innovation (Leonard-Barton, 1992). Consistent with the theory of the growth of the firm (Penrose, 1959), this suggests that managers in well-performing firms are more likely to choose global markets as regional markets associated with a narrower search that can lead to “increasingly rigid cognitive maps and highly specialized competencies that may become core rigidities” (Raisch & Birkinshaw, 2008: 393). Good performance also creates a buffer that allows firms to withstand the possible dangers from the riskier global segment and to establish a dominant position there in the long run. This is consistent with the firm heterogeneity literature, which suggests that only the firms with
sufficiently high profits will be able to overcome the high sunk costs of exporting and that the foreign geographic scope increases with the productivity of the firm (Bernard et al. 2006; Greenaway & Kneller 2007; Helpman 2006, Helpman et al., 2004; Melitz 2003). Ciuriak et al. (2011: 5) notes, “high productivity at the firm level often precedes entry into international markets, suggesting the presence of significant firm-level sunk costs that raise the productivity threshold that firms must clear to be able to profitably enter foreign markets.” Thus: Hypothesis 3: Ceteris paribus, for an internationalizing MNE, the greater its performance, the lower its home region orientation. The impact of HRO on performance. As reviewed earlier, empirical results are mixed regarding the effect of HRO on performance (e.g., Delios & Beamish, 2005; Elango, 2004; Li, 2005; Qian et al., 2010; Rugman et al., 2007). Internalization theory would cast regionalization as an outcome of the combination of resource position of the firm and the institutional environment, and does not have specific predictions on the implications of regionalization for performance. Hennart (2011) convincingly argued that firms can perform well at different levels of multinationality. While the theoretical argument that regionalization does not influence performance is convincing, it is an arduous task to theorize such a claim. Following Hennart (2007; 2011), we set up two competing hypotheses, arguing for positive and negative effects, and use the empirical data to identify the nature of the relationship. HRO can improve firm performance because firms attempt to minimize search and deliberation costs (Rangan, 2000) and maximize the financial gains from economies of regional agglomeration (Krugman, 1991; Stigler, 1951). Firms that cluster close to one another benefit from the concentration of their operations as efficiency gains are obtained from co-located suppliers (e.g., shared inputs), consumers (e.g., larger markets) (Krugman, 1991; Stigler, 1951), and skilled labor-market pooling (Marshall, 1920). Such co-location allows for easier access to a variety of suppliers, more competitive input prices, and greater specialization of products (Stigler, 1951). MNEs can benefit from both upstream and downstream agglomeration, as suppliers are more likely to cluster when MNE operations concentrate in a region. Additionally, MNEs can benefit from appealing to similar markets within the home region and, hence,
enjoy knowledge spillover effects due to frequent interactions of common buyers and suppliers (Alcacer & Chung, 2007). Adams and Jaffe (1996) found that firms’ plants that are co-located with the firms’ innovation activities are more efficient in their production than their out-of-state plants. This suggests that geographic distance lessens the benefits from regionalization economies as face-to-face interactions become more difficult (Rosenthal & Strange, 2003). HRO can also reduce firm performance because firms can seek to minimize risk (Agmon & Lessard, 1977; Dhanaraj & Beamish, 2004; Rugman, 1976; 1980) and congestion costs (Almeida & Kogut, 1997; Pouder & St. John, 1996; Shaver & Flyer, 2000) from diseconomies of regional expansion. The more MNEs are involved in global markets, the more MNEs are able to share their costs of production across geographic markets and increase their performance (Capar & Kotabe, 2003). Globalizing MNEs are also able to reach a larger number of global consumers with their products and, hence, increase their global market share vis-à-vis rivals. Increasing global diversification is also associated with increasing risk reduction from international diversification (e.g., Agmon & Lessard, 1977; Dhanaraj & Beamish, 2004; Rugman, 1976; 1980). Distant global markets are less correlated with one another than proximate regional markets (Speidell & Sappenfield, 1992), so an MNE pursuing a low HRO strategy is likely to be less affected by a regional economic crisis as it can readily shift expansion efforts into another, less affected global region, enhancing its overall profitability. If MNEs confine their geographic scope to the home region, they miss out on exploring new market opportunities globally, potentially exhausting the market opportunities within the home region and limiting the firms’ market share and profitability. Additionally, in a limited geographic space like the home region, congestion costs in the form of increased competition for valuable labor and capital inputs or increased risk of knowledge expropriation by geographically proximate rivals are likely to increase and to lead to shortages (Almeida & Kogut, 1997; Pouder & St. John, 1996; Shaver & Flyer, 2000). Thus: Hypothesis 4a: Ceteris paribus, for an internationalizing MNE, the greater its home region orientation, the greater its performance. Hypothesis 4b: Ceteris paribus, for an internationalizing MNE, the greater its home region orientation, the lower its performance.
RESEARCH DESIGN Research Context We tested our conceptual framework using data from the Triad (i.e., the U.S., Western Europe, and Japan; Ohmae, 1985; Rugman, 2000, 2005; Rugman & Verbeke, 2004). The Triad is an important geographic space for several key reasons. First, the Triad countries share similar macro-economic features: e.g., low economic growth, economic and financial infrastructures, government regulations, relatively homogenous consumer demand, high purchasing power ability of consumers, high urbanization, etc. (Ohmae, 1985; Rugman, 2000, 2005). Second, “[t]he Triad is home to most innovations in industry, and includes the three largest markets in the world for most new products” (Rugman & Verbeke, 2004: 4). Third, Rugman (2000) documented that 86% of the Fortune 500 Global MNEs are headquartered in these core Triad regions. This high Triad concentration is a “useful indicator of the Triad’s enduring importance” (Rugman, 2005: 59). Thus, by drawing on MNEs from all these markets simultaneously, we hope to enhance the external validity and comparability of our results. Data Sources We used the OSIRIS database to extract the Triad-based firms. OSIRIS is a commercially available financial database provided by Bureau Van Dijk that includes close to 70,000 companies (subsidiaries and parent firms) from around the world. The financial data in OSIRIS comes from firms’ annual reports and is provided by World’Vest Base (WVB), Korea Information Service (KIS), Teikoku Databank, Huaxia International Business Credit Consulting Company, Reuters, and Edgar Online (OSIRIS Data Guide, 2007). OSIRIS is seen as “one of the most comprehensive databases of listed companies” (Shao, Kwok, & Guedhami, 2010: 1397) and is being used increasingly for international research (e.g., Chakrabarti, Singh, & Mahmood, 2007; Chakrabarti, Vidal, & Mitchell, 2011; Rugman, 2007; Rugman, Kudina, & Yip, 2007; Rugman, Oh, & Lim, 2012). However, comprehensive coverage starts only after 1996, which constrained our observation window. Furthermore, if a company delists, it stays in the database, but its account is no longer updated annually by the OSIRIS technical staff. None of the firms in our sample had delisted over the sample period. OSIRIS’ geographic segment data coverage
also depends on the way firms report the data in their reports. As mentioned earlier, segment disclosure requirements are not systematic across countries and limit the data availability by country (Herrmann & Thomas, 1996). We randomly cross-checked the financial data reported in OSIRIS and in the firms’ annual reports and found both sources are consistent. Adjusting for these data limitations, our final sample consisted of firms based in 12 Triad countries (i.e., the U.S., Japan, Denmark, Finland, France, Germany, Ireland, Netherlands, Norway, Sweden, Switzerland, and the U.K.). Over the 1997-2006 period, these countries collectively represented 62.11% in average GDP share as a percentage of the world’s GDP 6, a reasonable coverage. We used the Bloomberg Terminal, a computer system provided by Bloomberg L.P., that provides real time and historical financial data of public companies worldwide, to extract the stock market capitalization for the firms in our sample. The macro-economic data in our analysis came from the World Bank and the United Nations University—Comparative Regional Integration Studies (UNU-CRIS). The Regional Institutional Diversity data came from the Business Environment Risk Intelligence (BERI) (e.g., Ali, 2003; Chong & Zanforlin, 2000; Knack & Keefer, 1995) and the Fraser Index of Economic Freedom of the World co-published by the CATO Institute, the Fraser Institute, and more than 70 think-tanks around the world 7 (e.g., DiRienzo et al., 2007; Gwartney et al., 2002; Nachum & Song, 2011). Appendices A and B describe the two indexes. We then proceeded by selecting the sample of firms based in the Triad nations. To ensure the firms were sufficiently independent to determine their own strategy, we excluded firms in which another entity held more than 25% ownership, as provided by OSIRIS (Bartram et al., 2007; Chen, 2007). We also excluded firms that are subsidiaries of the sampled firms because their financial statement data are already accounted for in their parent firms’ consolidated statements. Additionally, to ensure that the firms were multinational, we focused on firms with at least 10% foreign sales (e.g., Nachum, 2004; Sambharya, 1995). We dropped firms with less than two years of available data due to the panel data structure
Based on authors’ calculations using World Bank data. For more details, please refer to: http://www.freetheworld.com/datasets_efw.html. 19
requirements of our model. We also excluded the financial firms as they have very different capital structures, often affected by banking regulations for minimum capital requirements (Rajan & Zingales, 1995). Our approach is consistent with prior international finance research (e.g., Fama & French, 1992; La Porta et al., 2002; Mehran & Stulz, 2007), which has noted that “financial ratios and valuation metrics for banks are not directly comparable to financial ratios and valuation metrics for other firms” (Mehran & Stulz, 2007). IB research has also followed this practice (e.g., Reeb, Kwok, & Baek, 1998). These steps resulted in 625 MNEs from 1997 to 2006, or 3,061 firm-year observations (33.09% from the U.S., 28.91% from Western Europe, and 37.99% from Japan). This ten-year period is sufficiently long to capture the evolutionary nature of internationalization (Lu & Beamish, 2004) and is twice as long as the average timeframe in prior studies (e.g., Li, 2005; Rugman & Verbeke, 2008). Measures Home region orientation. Following prior research, we measured firms’ HRO with the ratio of regional sales (excluding domestic sales) to foreign sales (e.g., Banalieva & Eddleston, 2011; Delios & Beamish, 2005; Li, 2005; Rugman & Verbeke, 2008). The higher the ratio, the higher the firms’ HRO. We also adopted an alternative HRO measure as a robustness check, which we discuss later. Technological advantage. We captured firms’ technological advantage with the ratio of R&D expenditures-to-total sales, a widely-used measure of firms’ innovation input (e.g., Anand & Delios, 2002; Kirca et al., 2011; Meyer et al., 2009). We added the square term of R&D expenditures-to-total sales to test our theoretical arguments that technological advantage decreases HRO at an increasing rate. We also attempted to measure technological advantage with another time-varying firm-level measure—firm patents, an output measure of innovation (Hall, Thoma, & Torrisi, 2007)—but we encountered several data challenges. First, because firms file for patents with patent offices around the world, ensuring that the patent portfolio for each firm over time is complete becomes a challenging task (for an overview, see Thoma et al., 2010). Commercial patent data providers typically do not supply unique firm identifying numbers by which to assign patents to the same focal firm, leading to over- or under-counting a firm’s patent portfolio if company-patent matching is performed based solely on
company names (Thoma et al., 2010). Second, while Thoma et al. (2010) and Hall, Jaffee, and Trajtenberg (2001) have collected firms’ patent data and provided unique company identifying numbers to overcome the company name matching problem, their database covers only approximately 58.8% of all EPO applications granted between 1979 and 2008. We attempted to use the Thoma et al. (2010) and Hall et al. (2001) patent datasets to match with the firms in our sample. However, this resulted in a sparse patent portfolio matrix for each focal firm due to the many zeros obtained when firms did not file for patents, leading to difficulties in interpreting the results. These data-related challenges prevented us from using patents as an alternative firm-level and time-varying measure of firms’ technological advantage. Regional institutional diversity. We followed two steps to measure Regional Institutional Diversity. First, we assigned the countries from the BERI index into “home region” and “global” segments based on the United Nations (UN) country classifications (Appendix C) following prior research that also uses these UN country mappings (Arregle et al., 2009; Flores & Aguilera, 2007). Since the geographic-based approach to country groupings is time-invariant (Aguilera et al., 2007), it allows us to disentangle the effect of regional institutional diversity from a possible change in region definition over time. Second, we measured the Regional Institutional Diversity with the coefficient of variation of the BERI Index across the home region, excluding the focal firm’s home country. The coefficient of variation is the standard deviation of the distribution divided by its mean. A higher coefficient of variation indicates greater regional institutional diversity (Pfeffer & Langton, 1993). Performance. We measured firms’ performance with return on assets (ROA); i.e., earnings before tax/total assets (e.g., Bashir, 2003; Charumilind, Kali, & Wiwattanakantang, 2006; Manos, Murinde, & Green, 2007). ROA captures the ability of managers to reap profits from their invested assets. We also used the ln of Tobin’s Q as an alternative performance measure, which we discuss later. Control variables. We controlled for a range of additional factors summarized in Table 1. *** Insert Table 1 Here ***
Methodology The conceptual framework in Figure 2 can be modeled empirically with the following system of equations for firm i, home region r, identifying and control variable j, and year t: Eq.1: Performance i,t+1= a0 + a1*HRO i,t+1 +aj*Identifying & Control Variables j,t +e1i,t Eq.2: HRO i,t+1 = b0 + b1*Performance i,t+1 + b2*Technological Advantage i,t + b3*Technological Advantage sq.i,t + b4* Regional Institutional Diversity i,r,t + b5* Identifying & Control Variables j,t + e2i,t Since Performance and HRO are determined simultaneously, they are correlated with the error terms e1 and e2, which makes OLS inappropriate (Greene, 2003; Wooldridge, 2009). The proper estimation methodology is simultaneous equations models, as it explicitly models the simultaneity between HRO and performance (Greene, 2003). In doing so, the model considers the exogenous variables to jointly determine each endogenous variable and to construct the set of instruments for the endogenous variables (Kennedy, 2001; Wooldridge, 2009). Using such simultaneous equations methodology is an important empirical advancement to the regional/global strategies literature, as prior studies have not explicitly taken into account this simultaneity (e.g., Delios & Beamish, 2005; Elango, 2004; Li, 2005; Rugman & Verbeke, 2004). ”[T]he failure to statistically correct for endogeneity can lead not only to biased coefficient estimates but, more importantly to faulty conclusions about theoretical propositions” (Hamilton & Nickerson, 2003: 52). After the Hausman test revealed that fixed effects are better than random, we followed prior research and took advantage of the panel structure of our data by demeaning the variables with the within (fixed effects) transformation (e.g., Clougherty, 2006; Wooldridge, 2009). This procedure is identical to adding dummy variables for each firm in the regression, but demeaning the data instead preserves degrees of freedom (e.g., Clougherty, 2006; Wooldridge, 2009). Thus, firm heterogeneity that can arise from time-invariant variables (e.g., industry, country, region, geographic distance, language, colonial ties, common border, etc.) is accounted for through the firm fixed effects (Wooldridge, 2009). As timeinvariant variables would be perfectly collinear with the fixed effects, their inclusion is not necessary (Wooldridge, 2009). We lagged the exogenous variables one year with respect to the dependent variables
to facilitate the direction of causality (e.g., Elango & Pattnaik, 2007) and standardized the regression coefficients so they can be readily compared (e.g., Ait-Sahalia & Brandt, 2001). We next employed two-stage least squares (2SLS) and three-stage least squares (3SLS) to test the simultaneous equations model. Both the 2SLS and 3SLS estimators use instrumental variables. 2SLS estimates each equation separately so it keeps possible mis-specification to one equation but it also ignores the information contained in the correlation between the error terms (Wooldridge, 2009). 3SLS estimates all equations jointly so it uses the full information in the model but also runs a higher misspecification chance (Wooldridge, 2009). However, when the 2SLS and 3SLS models yield similar results, they increase the robustness of the findings (Kumar, 2009). In simultaneous equations models, identification of each equation needs to be achieved for proper estimation by ensuring that the number of exogenous variables excluded from each equation is at least as great as the number of endogenous variables in the system minus one (a necessary but not sufficient condition) (Johnston, 1972). Thus, each equation needs to include at least one variable that is not in the other equation for identification purposes. To identify Eq. 1, we used Leverage (total liabilities-to-total assets), as higher leverage may impede firm performance as firms borrow more debt that they have to repay later (Li, 2005). To identify Eq. 2, we used Currency Zone, as firms based in currency zones are more likely to be regionally oriented; RTA Trade, as firms based in RTAs are more likely to take advantage of regional integration; and Domestic Market Size, as firms based in larger domestic markets may be more regionally oriented given their familiarity with greater consumer demand locally. Currency Zone is equal to 1 for countries with no common currency; i.e., 1997-2006: US, Japan, Denmark, Norway, Sweden, Switzerland, and the UK; 1997-1998: Germany, Finland, France, Ireland, and Netherlands; and equal to 2 otherwise. RTA Trade is equal to (HITIi,t - HETIi,t)/(HITIi,t + HETIi,t), where HITIi,t stands for “homogeneous intra-regional trade intensity” index and HETI stands for “homogeneous extra-regional trade intensity” index (Iapadre, 2006). Both HETI and HITI are functions of the region’s share of outsiders’ total trade (Iapadre, 2006; Plummer, Cheong, & Hamanaka, 2010). RTA Trade rises if
the intensity of intra-regional trade grows faster than that of extra-regional trade. We also captured Domestic Market Size with the natural log of GDP (in U.S. dollars). We checked that the equations are properly identified in three ways. First, we ensured that the identifying variables for Eq. 2 are correlated with HRO but not with Performance, and that the identifying variable for Eq. 1 is correlated with Performance but not with HRO. The correlations in Table 2 support this criterion as Leverage is significantly (p<0.05) correlated only with Performance but not with HRO, and Currency Zone, RTA Trade, and Domestic Market Size are significantly (p<0.05) correlated only with HRO but not with Performance. Second, we performed the Sargan test of over-identifying restrictions (Greene, 2003; Sargan, 1958; Wooldridge, 2009) to confirm that the identifying variables are properly included in their respective equation and excluded from the other equation. A statistically insignificant pvalue of the Sargan test suggests that the system of equations is properly identified: the Sargan test pvalue was 0.5790, confirming that the identifying variables are indeed exogenous. Third, we performed the rank condition test (a necessary and sufficient condition for identification) to ensure the model could be properly estimated (Johnston, 1972). The system of equations passed the rank condition test as well. *** Insert Table 2 Here *** RESULTS The 2SLS and 3SLS regression analyses yielded similar results, so we present the 3SLS findings throughout our paper as they are more consistent and asymptotically efficient than 2SLS (Kumar, 2009). The results follow in Table 3. We tested hypotheses 1-3 on column 1 and hypothesis 4 on column 2. *** Insert Table 3 Here *** Hypothesis 1 predicted that Technological Advantage will have a negative coefficient for both the linear and the squared terms. Column 1 shows that, while we find that the signs of Technological Advantage are as expected, the linear term is not significant. However, the squared term is significant (p<0.05), and thus providing partial support for hypothesis 1. Hypothesis 2 is fully supported because column 1 shows that Regional Institutional Diversity had a negative and significant (p<0.001) effect on firms’ HRO. Hypothesis 3 is also fully supported because column 1 shows that performance significantly
(p<0.05) decreased HRO. The competing hypotheses 4a and 4b were not supported because column 2 showed that HRO had no significant effect on firm performance. This finding suggests that the causality runs from performance to HRO such that when the internal and external inducements to growth are properly accounted for, they balance out any possible performance gains from a greater HRO preference. It is possible that prior research finds significant effects of HRO on performance because it has not controlled for the effects of its antecedents. When the errors are correlated in a simultaneous equations model, “a statistical relationship between M [HRO in our case] and Y [performance in our case] could be ‘driven’ by an actual relationship between the two variables or by any other factor that affects both M and Y yet is not explicitly included in the two regression equations” (Shaver, 2005: 337). The coefficients of the control variables on HRO in column 1 reveal some interesting findings as well. For instance, larger firm size, larger domestic market size, and faster RTA trade decrease HRO significantly. Conversely, industry diversification, regional market attractiveness, and currency zone increase HRO significantly. Similarly, in column 2, a greater industry diversification, regional market attractiveness, and leverage significantly improved firm performance. We proceed by graphing the sample HRO vs. the sample Technological Advantage (Figure 3a) and the average HRO vs. the three categories (low, medium, or high) of Technological Advantage (Figure 3b). For Figure 3b, we split the MNEs by first finding the sample average for Technological Advantage (0.05), and then finding the average Technological Advantage for the above-sample average group (0.12) and the average Technological Advantage for the below-sample average group (0.02). Thus, the lowtechnology MNEs (1,766 firm-year obs.) had Technological Advantage less than 0.02 and an average HRO of 0.40. The medium-technology Triad MNEs (976 firm-year obs.) had Technological Advantage between 0.02 and 0.12 and an average HRO of 0.39. The high-technology Triad MNEs (319 firm-year obs.) had Technological Advantage above 0.12 and an average HRO of 0.19. These results are consistent with the previously-documented pyramidal structure of MNEs according to which most firms are regional and very few expand globally. They are also in line with the firm heterogeneity literature in international economics, where only a few firms serve foreign markets and most serve their home market (e.g., Bernard
et al. 2006; Helpman et al., 2004; Melitz, 2003). Our findings suggest two reasons for this pyramidal structure. First, the results show that most (89.58%) of the Triad MNEs are low-to-medium technology firms that lack the necessary technology capability to venture globally, in line with Rugman and Verbeke (2004, 2008). Second, the results show that the average HRO declines at an increasing rate as Technological Advantage increases. For example, the average HRO declines by 0.1 point between the low and medium-technology firms but it declines by a much larger amount—0.20 points—between the medium and high-technology firms, illustrating the increasing returns mechanism. *** Insert Figures 3a-3b Here *** Robustness Tests We performed additional robustness tests to rule out possible alternative explanations for our results 8. Due to space considerations, we present some of these additional tests in Tables 4a and 4b, with full results available from the authors upon request. *** Insert Tables 4a-4b Here *** First, we retested the models with a market-based performance measure: Tobin’s Q (ln of market capitalization plus book value of liabilities divided by book value of assets, Cummins, Lewis, & Wei, 2006) and present the results in model 1. Similarly to the model with ROA, we find partial support for hypothesis 1 and full support for hypothesis 2. We did not find support for hypothesis 3, suggesting that our argument of performance being indicative of internal perception of slack resources may be more consistent with accounting-based measures like ROA than with market-based measures like Tobin’s Q that include investors’ forward expectations about the company. We also did not find support for hypotheses 4a or 4b, suggesting that HRO does not affect market-based performance significantly. Second, we replaced the BERI composite measure with each of its three sub-components (Appendix A) and present the results in models 2-4 in Tables 4a-4b. The results were consistent with our previous analysis. We next replaced the BERI measure with the alternative Fraser index (DiRienzo et al., 2007; Gwartney et al., 2002; Nachum & Song, 2011) and report the results in model 5. The results were
We are grateful for the two anonymous reviewers for suggesting some of these robustness tests. 26
consistent. We next used each of the Fraser sub-components (Appendix B). The results for hypotheses 1 and 3 were consistent. Hypothesis 2 was fully supported only with the Government and Legal Fraser subcomponents. Neither of the competing hypotheses 4a or 4b was supported except for the model with the Government sub-index, which was the only model where HRO increased performance significantly (p<0.05). Among other factors, the government sub-component captures marginal tax rates and government expenditure, which are essential for MNEs and likely drivers for the significant effect. Third, we tested the models with an alternative HRO measure: rest of home regional sales/total sales – global sales/total sales adapted from prior research (Asmussen, 2009; Elango, 2004; Rugman & Verbeke, 2008). This alternative measure is 85% correlated with our main measure of regional sales/foreign sales. As before, we found partial support for hypothesis 1 and full support for hypothesis 2. Performance decreased HRO but not significantly so, thus finding no support for hypothesis 3. As before, we did not find support for either of the competing hypotheses 4a or 4b. DISCUSSION Our results present a compelling theoretical explanation for the regionalization phenomenon that has been gaining a growing scholarly attention. Our empirically supported, theoretical proposition that non-linear behavior of firms’ technological advantage dictates their geographic scope and their distance in international expansion opens a major avenue for further research. Specifically, we found that HRO decreases rapidly as a result of increasing technological advantage, suggesting that MNEs’ geographic scope increases globally, and more-than-proportionately, as technological advantage increases (i.e., the increasing returns mechanism). This presents a plausible explanation of Rugman’s (2005) observation of the pyramidal structure of firms’ geographic scope whereby most firms are regional, some are bi-regional, and only a few are global. This finding is also consistent with the firm heterogeneity literature in international economics, where only a few firms serve foreign markets and most serve their domestic market (e.g., Bernard et al. 2006; Helpman et al., 2004; Melitz, 2003). It also extends Cerrato’s (2009) finding that innovation in the Italian manufacturing industry proportionately enables a firm to overcome the liabilities of global foreignness. Our integration of the increasing returns concept with internalization
theory fits well with the broad empirical observations within the geographic scope stream in explaining both the internationalization intensity as well as the nuanced gradation of firms’ locational strategies. Even though technology has received major attention from IB scholars, very little attention has been given to the dynamics of technology in determining firm-level phenomena like HRO. Prior studies that have used the increasing returns notion have tended to focus on industry and country-level analyses. For instance, Nachum and Zaheer (2005) incorporated the increasing returns notion in their analysis of the telecommunications industry. Krugman (2010), too, invoked the increasing returns notion and integrated it with countries’ comparative advantage to explain how focused locations within countries are dictating countries’ international trade patterns. Little has remained understood as to whether and how increasing returns can affect firm-level phenomena like geographic scope. Our paper shed new light into this area. Furthermore, our results on the overwhelming effect of regional institutional diversity present a window on why firms would go global rather than stay regional, even considering the liabilities of working across the regions (Rugman & Verbeke, 2008). Internationalization patterns of firms in markets such as Japan, China, and India are less regional and the institutional diversity may provide an explanation. Unlike prior research that has analyzed institutional effects in terms of distance, we used a variance measure on a wide range of institutional components and found consistent and significant negative effects of regional institutional diversity on firms’ HRO. Unfortunately, our model does not go far enough to explain the presence of bi-regional firms. Having specific regional boundaries, the Triad in our model, we were unable to explore the possibility of firms selecting specific countries within the home region to focus their activities. For example, firms in the U.S. and Canada seem to focus on the NAFTA region more than outside NAFTA. These are interesting possibilities for future research. Nevertheless, the fundamental premise we propose here stands: firms seek to minimize their institutional diversity of the environments that they work in. We also analyzed the dynamics of HRO evolution over 1997 to 2006. Our t-test with unequal variance and Welch’s adjustment showed that the average HRO has grown significantly (p<0.05) from 0.325 in 1997 to 0.414 in 2006. We also graphed the longitudinal trends between 1997 and 2006 for each
of the Triad branches and present the results in Figure 4. European MNEs were the most regional in the sample. American firms were the least regional, with an average HRO slightly decreasing over time. Japanese firms became increasingly regional over the sample period and reached and slightly surpassed the Western European firms’ HRO in 2006. This evidence of a growing regional trend among Japanese MNEs is consistent with other findings (Collinson & Rugman, 2008; Delios & Beamish, 2005), perhaps owing to the growing trade relationship between Japan and China (METI, 2004). ***Insert Figure 4 Here*** Additionally, our post-hoc analysis on the dynamics of HRO over time confirmed the importance of regional integration. For instance, European MNEs were the most regional while American firms were the least. The impact of regional trade agreements in diffusing patterns across the region and thus reducing institutional diversity has been well analyzed in the literature. However, we still find the persistence of firms’ HRO over time, with our t-test revealing that HRO actually increased significantly from 1997 to 2006. If we follow the internationalization models derived from the Uppsala school (Johansson & Vahlne, 1977), we should logically see a diminishing HRO over time. Eventually, as firms mature, they should increase their geographic scope to global markets. However, it is perplexing to see the persistence of regionalization, even after multiple decades of firm operations. Such dynamic analysis poses an interesting question as to what drives the persistence of regional boundaries in international expansion? Arregle et al. (2009) provide a useful first step in that direction. The simultaneous effect of performance on HRO depicts a very different picture from prior studies that have focused exclusively on analyzing the effect of HRO on performance. These prior studies have treated regionalization as an independent variable, and inferred positive and negative effects on performance. We extended this prior research by arguing for a simultaneous relationship between HRO and performance. We showed that while performance drives HRO, HRO does not influence performance significantly, after accounting for HRO’s antecedents and extensive control variables. We had the difficult task of proving a null hypothesis, which we overcame by using a set of competing hypotheses. In line with Hennart (2007, 2011), we found that geographic scope is in itself constrained or driven by other
variables and hence, not a strategic option by which performance can be enhanced or diminished. We also took a very careful approach to properly account for HRO’s antecedents in our model, and perhaps provide a better prediction of the performance impact than other models, which do not control for them. Our study has several limitations. We focused our analysis on firms’ HRO in their sales-based foreign market penetration strategies (e.g., Elango, 2004; Li, 2005; Rugman & Verbeke, 2004, 2008). However, analyzing firms’ HRO in other types of foreign strategies, such as purchasing or sourcing, or using subsidiary level data can further enhance the generalizability of our findings. Unfortunately, our data was limited by the publicly available databases, and thus we do not have specific information on the internationalization motives of the firm. Our control for domestic market size can mitigate this problem in some way as firms based in larger domestic markets are more likely to internationalize in search of cheaper foreign production, while firms based in smaller domestic markets may be more likely to internationalize in search of new market opportunities (Dunning & Lundan, 2008; Moon, 1994). A major constraint we had was our technological advantage measure. Even though we used R&D intensity as the most commonly used measure for technology (Kirca et al., 2011), there is an increasing realization that we need to expand beyond it to capture a firm’s technological advantage. However, we have not yet, as a field, generated a comparable-across-different-geographies technology measure as internationally compatible patent measures are difficult to compile (Thoma et al., 2010). Given the centrality of the innovation and technology focus, this remains an unresolved issue for cross-country IB research like ours. CONCLUSION We used internalization theory to investigate the geographic scope of a firm, paying particular attention to the decision to concentrate their activities within or outside their home region. We have developed a theory-driven explanation of geographic scope, empirically validated with Triad-based MNE data. We showed how technological advantage and regional institutional diversity determine HRO, and suggested a simultaneous relationship between HRO and performance. Thus, we hope our study serves as a useful platform to advance future theory development on geographic scope.
A decade of research on regionalization with converging empirical data demands that the IB field take a fresh look at how we construct geographic scope and theorize on its impact on performance. It demands for a move away from simple notions of domestic vs. international expansion, and take a more conscious look at the locational aspects. We have attempted to steer the conversation away from different ontological debates regarding defining regions or measuring regionalization, and towards how firms expand their geographic scope (Flores & Aguilera, 2007: 16). A longitudinal view of the international expansion processes, understanding how technology enables penetrating distant markets, and how institutional diversity enables or diffuses home regional concentration would add useful insights for both IB theory and practice. Such an approach can integrate other forms of international activity such as alliances, which can provide a complementary perspective of how firms use diverse entry modes to exploit their FSAs across diverse geographies. Expanding the regionalization research to frame the international firms as a geographically distributed network, and to study the dynamic changes in the network over time, dictated by technology and environment, will also be useful ways to extend future research. Such network-based approaches can capture the element of randomness or idiosyncrasy, which seems to be prevalent in many early internationalization decisions. Such studies on the dynamics of geographic scope will also uncover some of the viscous elements within international strategy that constrain firms’ internationalization paths, and lead to a persistent focus on the home region. Our model focusing on technology and environment provides a point of departure for such research.
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Figure 1 Key Milestones in the Evolution of the Regionalization Perspective
TCE theory of regionalization Rugman & Verbeke (2005)
Regionalization Japanese data Collinson & Rugman (2008) Japanese Data Longitudinal FDI Arregle et al. (2009):
Regionalization Perspective (Global 500) Rugman & Verbeke (2004) Transnational Strategy for a Flat World Levitt (1983) Prahalad & Doz (1987) Bartlett & Ghoshal (1989) Porter (1990) Yip (1992) Cairncross (1998) Friedman (1999) Real world managers think “regional” Morrison et al. (1991) End of globalization Rugman (2000) Distance matters Ghemawat (2003) Rethinking global strategy
Regionalization Italian data Cerrato (2009)
Region options & sensitivity
Aguilera & Co (2007) Relevance of the Triad Rugman & Verbeke (2007) Macro data using culture clusters Dunning et al. (2007)
Modify regionalization measure to exclude domestic sales Rugman & Verbeke (2008)
Normalized measure of regionalization Asmussen (2009)
Challenging regionalization’s measure & generalizability Osegowitsch & Sammartino (2008)
Figure 2 Conceptual Model and Hypotheses
Non-Location-Bound FSA Technological Advantage H1: (negative nonlinear) H3: (-) Home Region Orientation H2: (-) Institutional Environment Regional Institutional Diversity H4a: (+) H4b: (-) Performance
Control & Identifying Variables Location-Bound FSA (Marketing Advantage) Multinationality Regional Market Attractiveness Firm Age Institutional Distance Firm Size Industry Diversification Industry Home Region Orientation Leverage* Currency Zone^ Domestic Market Size^ RTA Trade^
* identifying variable in performance eq. ^ identifying variable in home region orientation eq.
Figure 3a Sample Home Region Orientation vs. Technological Advantage
1 0 .2 Home Region Orientation .4 .6 .8
Technological Advantage Technology Advantage
Figure 3b Average Home Region Orientation vs. Technological Advantage
Average Home Region Orientatio
0.40 0.40 0.39
0.00 Low Medium Technological Advantage High
NOTE: HRO is rest of home region sales/foreign sales. The “Low”, “Medium,” and “High” categories have 1,766; 976; and 319 observations, respectively.
Figure 4 Longitudinal Trends in the Home Region Orientation of the Triad
Home Region Orientation
0.4 0.3 0.2 0.1 0
Year USA Western Europe Japan
Table 1 Control Variables Measure Marketing Advantage Multinationality Industry Diversification Regional Market Attractiveness Firm Age Institutional Distance Operationalization selling, general, administrative expenses/total sales foreign sales/total sales Rationale Control for location-bound FSAs (Anand & Delios, 2002) Control for international expansion (Li, 2005; Rugman & Verbeke, 2008) Control for industry diversification (Tallman & Li, 1996) Control for market attractiveness (Goerzen & Beamish, 2003) Control for experience effects Control for institutional distance between home country, rest of home region, and global segment
1 − ∑ (s i ) , si is the share of sales from business segment i
Rest of home region GDP growth ln(number of years since incorporation+1) (Average Global-to-Home Country Distance + Average Rest-to-Home Country Distance)/2, where: Average Global-to-Home Country Distance =(Average Global BERI Score – Home Country BERI Score); Average Rest-to-Home Country Distance = (Average Rest of Home Region BERI Score – Home Country BERI Score) ln total sales (thousands of U.S. dollars) Average HRO for the focal firm’s competitors in each industry (sic2) and year, excluding the focal firm’s HRO Fixed effects within-transformation of the variables
Firm Size Industry HRO Firm Effects
0-1 dummy variables for each year, 1997 base year
Control for economies of scale Control for industry isomorphism effects Control for firm fixed effects (Clougherty, 2006; Wooldridge, 2009) Control for business cycle effects (Li, 2005)
Table 2 Descriptive Statistics and Correlations Matrix
Variable 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 ROA Home Region Orientation Technological Advantage Marketing Advantage Multinationality Regional Institutional Diversity Industry Home Region Orientation Institutional Distance Firm Age Firm Size Regional Market Attractiveness Industry Diversification Leverage Domestic Market Size Currency Zone RTA Trade Mean 0.05 0.37 0.05 0.23 0.43 0.21 0.38 -17.26 3.58 13.28 4.43 0.40 0.51 28.97 1.11 0.71 S.D. 0.09 0.31 0.06 0.15 0.24 0.02 0.12 5.15 1.03 2.04 1.59 0.25 0.24 1.10 0.32 0.21 1 1.00 0.00 -0.18 -0.11 0.04 -0.14 0.01 0.07 0.06 0.17 0.04 -0.03 -0.16 0.01 0.00 0.00 1.00 -0.23 -0.26 -0.06 0.16 0.22 0.01 0.12 -0.06 0.21 -0.05 0.03 -0.35 0.15 -0.05 1.00 0.55 0.22 -0.15 -0.17 0.11 -0.28 -0.17 -0.13 -0.07 -0.21 0.07 0.05 -0.02 1.00 0.07 -0.09 -0.13 0.07 -0.24 -0.32 -0.11 -0.09 -0.27 0.19 -0.17 0.04 1.00 -0.27 -0.07 0.40 -0.10 0.08 -0.15 0.01 0.05 -0.43 0.37 -0.24 1.00 0.14 -0.16 0.33 0.08 0.36 -0.04 0.01 -0.07 -0.10 0.24 1.00 0.04 0.15 0.14 0.23 0.05 0.04 -0.08 0.02 -0.03 1.00 -0.20 -0.11 -0.12 -0.05 0.07 -0.36 0.29 0.35 1.00 0.37 0.23 0.13 0.11 -0.06 -0.02 0.04 1.00 0.03 0.38 0.31 0.03 0.13 0.03 1.00 -0.03 -0.03 -0.06 -0.06 0.06 1.00 0.20 0.12 0.05 0.05 1.00 -0.08 0.09 0.00 1.00 -0.45 0.29 1.00 0.12 2 3 4 5 6 7 8 9 10 11 12 13 14 15
NOTE: Bold indicates significance at 5%. N=3,061.
Table 3 Three-Stage Least Squares Regression Results
Dependent Variable: Technological Advantage Technological Advantage sq. Regional Institutional Diversity Performance Home Region Orientation Marketing Advantage Multinationality Firm Size Firm Age Industry Diversification Regional Market Attractiveness Institutional Distance Industry HRO Domestic Market Size Currency Zone RTA Trade Leverage 0.212*** (3.696) Chi-sq. 155.68*** NOTE: t-statistics in parentheses. N=2,436. +p<0.10; *p<0.05; **p<0.01; ***p<0.001. Constant -0.021 (0.988) -0.001 (0.061) -0.085** (2.845) 0.081** (3.206) 0.043* (2.082) 0.066+ (1.850) 0.013 (0.435) 0.023 (1.090) -0.141*** (3.944) 0.058** (2.668) -0.073** (2.598) HRO -0.021 (1.001) -0.007* (2.485) -0.145*** (6.078) -0.240* (1.999) ROA -0.010 (0.472) -0.007* (2.280) 0.001 (0.028)
0.216 (0.954) -0.016 (0.774) -0.019 (0.946) -0.161*** (6.014) 0.016 (0.628) 0.046* (2.318) 0.091* (2.447) 0.026 (0.911) -0.024 (1.140)
0.170*** (8.036) 0.244*** (4.909) 339.86***
Table 4a Three Stage Least Squares Robustness Tests with Home Region Orientation as the Dependent Variable Model 1 HRO Model 2 HRO -0.238* (1.987) -0.020 (0.963) -0.008* (2.540) Model 3 HRO -0.283* (2.297) -0.019 (0.923) -0.008** (2.640) Model 4 HRO -0.235* (1.965) -0.020 (0.982) -0.007* (2.418) Model 5 HRO -0.234+ (1.900) -0.022 (1.076) -0.007* (2.500)
Dependent Variable: Independent Variables:
Performance -1.019 (1.499) Technological Advantage -0.073 (1.577) Technological Advantage sq. -0.011* (2.041) Regional Institutional Diversity (BERI) -0.105** (2.684) Regional Institutional Diversity (Beri-ORI) Regional Institutional Diversity (Beri-PRI) Regional Institutional Diversity (Beri-Rfactor) Regional Institutional Diversity (Fraser)
-0.108*** (4.836) 0.010 (0.395) -0.158*** (6.301) -0.051+ (1.855)
NOTE: All control variables were included in models but were omitted here for space consideration. t-statistics in parentheses. Beri-ORI, PRI, and RFactor stand for the Operational, Political, and Remittances sub-components of the BERI index. N=2,436. +p<0.10; *p<0.05; **p<0.01; ***p<0.001.
Table 4b Three Stage Least Squares Robustness Tests with Performance as the Dependent Variable Model 1 Tobin's Q Home Region Orientation 0.368 (1.064) Model 2 ROA 0.233 (1.261) Model 3 ROA 0.231 (1.233) Model 4 ROA 0.162 (0.635) Model 5 ROA 0.221 (1.100)
Dependent Variable: Independent Variable:
NOTE: All control variables were included in models but were omitted here for space consideration. t-statistics in parentheses. N=2,436. +p<0.10; *p<0.05; **p<0.01; ***p<0.001.
APPENDIX A Description of the BERI index
Sub-Index Operational Objective Focuses on the operations climate of doing business in that country. Captures the degree to which nationals are given preferential treatment and the general quality of the business climate. Criteria Captures policy continuity, attitude: foreign investors and profits, degree of privatization, monetary inflation, balance of payments, bureaucratic delays, economic growth, currency convertibility, contract enforceability, labor cost/productivity, professional services and contractors, communications and transportation, local management and partners, short-term credit, long-term loans and venture capital. Captures party fractionalization; language and ethnic fractionalization; coercive measures to retain power; xenophobic and nationalistic sentiments; population density and wealth distribution; organization of forces for a radical government; dependence on a major hostile power; negative influence of regional political forces; societal conflicts; & instability as perceived by unconstitutional changes and guerilla wars. Continuous Range 70-100 Stable environment typical of an advanced industrialized economy; 55-69 There are some complications in day-today operations; 40-54 There are major complications in day-today operations; 0-39 Unacceptable business conditions
Focuses on socio-political conditions in a country.
70-100 Stable environment, political changes will not lead to conditions seriously adverse to business; 55-69 Political changes seriously adverse to business have occurred in the past, but governments in power have a low probability of introducing such changes; 40-54 Political developments seriously adverse to business exist or could occur; 0-39 Unacceptable political conditions severely restrict business operations. Loss of assets from rioting and insurgencies is possible. 0-100 (BERI does not provide specific cut-off points for this sub-index, but simply indicates that higher values mean more stable business environment, consistent with the range interpretations of the other two sub-indexes).
Remittances and Repatriation of Capital
Focuses on a country's capacity and Includes a legal framework sub-index, foreign willingness for foreign companies to exchange generation sub-index, accumulated convert profits and capital in the international reserves sub-index, foreign debt local currency to foreign exchange assessment sub-index. and transfer the funds, and have access to convertible currency to import components, equipment, and raw materials. Source: Business Environment Risk Intelligence (BERI) (2008).
APPENDIX B Description of the Fraser index Sub-Index Area 1: Government Objective Captures size of government: expenditures; taxes, and enterprises Captures legal structure and security of property rights Criteria General government consumption spending; transfers and subsidies as % of GDP; government enterprises and investment; top marginal tax rate. Judicial independence; impartial courts; property rights protection; military interference in rule of law and political process; integrity of the legal system; legal enforcement of contracts; regulatory restrictions on the sale of real property. Money growth; inflation; freedom to own foreign bank accounts; taxes on international trade; trade barriers; size of trade sector; black market exchange rates; international capital market controls. Credit market regulations; labor market regulations; business regulations. Continuous Range 0-10, with higher values meaning better government quality 0-10, with higher values meaning better legal quality
Area 2: Legal
Areas 3 & 4: Economic Area 5: Regulatory
Captures access to sound money and freedom to trade internationally Captures the regulation of credit, labor, and business
0-10, with higher values meaning better economic quality 0-10, with higher values meaning better regulatory quality
Source: Gwartney et al. (2002).
APPENDIX C United Nations’ Country Groupings Asia & Oceania Armenia Australia* Azerbaijan Bahrain Bangladesh China* Cyprus Fiji Georgia Hong Kong India* Indonesia* Iran* Israel* Japan* Jordan Kazakhstan* Korea, South* Kuwait Kyrgyzstan Malaysia* Mongolia* Myanmar Nepal New Zealand Oman Pakistan* Papua New Guinea Philippines* Singapore* Sri Lanka Syria Taiwan* Thailand* Turkey* UAE Vietnam* Europe Albania Austria* Belgium* Bosnia & H. Bulgaria Croatia Czech Rep.* Denmark* Estonia Finland* France* Germany* Greece* Hungary Iceland Ireland* Italy* Latvia Lithuania Luxembourg Macedonia Malta Moldova Netherlands* Norway* Poland* Portugal* Romania Russia* Slovak Rep Slovenia Spain* Sweden* Switzerland* Ukraine* United Kingdom* Americas Argentina* Bahamas Barbados Belize Bolivia Brazil* Canada* Chile* Colombia* Costa Rica Dominican Rep. Ecuador* El Salvador Guatemala Guyana Haiti Honduras Jamaica Mexico* Nicaragua Panama Paraguay Peru* Trinidad & Tobago United States* Uruguay Venezuela* Other Algeria Angola Benin Botswana Burkina Faso Burundi Cameroon Central Afr. Republic Chad Congo, Dem. Republic Congo, Rep. Of Cote d'Ivoire Egypt* Ethiopia Gabon Ghana Guinea-Bissau Kenya Lesotho Madagascar Malawi Mali Mauritania Mauritius Morocco* Mozambique Namibia Niger Nigeria* Rwanda Senegal Sierra Leone South Africa* Tanzania Togo Tunisia Uganda, Zambia, Zimbabwe
NOTE: The above countries are covered by the Fraser Index of Economic Freedom. Countries marked with * are also covered by BERI, which also covers Saudi Arabia. Even though BERI covers only 53 countries compared to the 139 that Fraser covers, the 53 BERI countries represent the majority of economic activity in the world: e.g., as of 2007, they comprised 95% of the world’s GDP (based on authors’ calculations using World Bank data on GDP).
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