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MBR
27,4 The impact of home-country
conditions and geographical
diversification on the
364 domestic productivity of
Received 6 July 2018
Revised 30 October 2018
telecom multinationals
14 December 2018
Accepted 27 December 2018 A multi-country study
Pavlos Symeou
Cyprus University of Technology, Lemesos, Cyprus, and
Hemant Merchant
University of South Florida – St. Petersburg, St. Petersburg, Florida, USA

Abstract
Purpose – Previous work in international business largely disregards the interplay between home-country
conditions and firms’ geographical diversification – implying that, regardless of indigenous conditions, firms
can modify their domestic performance (which the authors measure in terms of change in firms’ domestic
productivity) merely by diversifying into international markets. The authors contest this view and argue that
diversification does not substitute for home-country conditions. Rather, it moderates the baseline impact of
home-country conditions on indigenous firms’ domestic performance. The purpose of this study is to describe
these mechanisms and empirically examine their implications for indigenous firms’ performance.
Design/methodology/approach – The authors investigate the above model based on a 20-year
longitudinal analysis of 600 observations involving telecommunication incumbents from 65 countries. They
control for possible reverse causality between firms’ international diversification (and other firm-specific
factors) and their domestic performance, and conduct several robustness checks.
Findings – The authors find – as hypothesized – that international diversification moderates the baseline
performance impact of different home-country attributes in different ways. Such diversification does not have
a uniform moderating effect on home-country attributes. In other words, the baseline effects of home-country
conditions are altered as indigenous firms become more internationalized.
Originality/value – Theoretically, this work bridges the micro- and macro-level arguments that interweave
strands from the competitive strategy and national competitive advantage literatures. By unpacking
diversification’s role vis-à-vis the effect of upstream (home-country) conditions on firm performance, the
authors attempt to shed light on the mechanisms that help (or hinder) indigenous firms’ performance.
Empirically, this study helps to reconcile seemingly opposite views about whether and, if so, how much home-
country conditions shape indigenous firms’ expansion after they have diversified internationally.
Keywords Competitiveness, Telecommunications industry, Geographical diversification,
Firm’s domestic productivity, Home-country conditions
Paper type Research paper

Multinational Business Review

Introduction
Vol. 27 No. 4, 2019
pp. 364-396
A key component of IB theories is the role of home-country attributes in defining indigenous
© Emerald Publishing Limited firms’ initial operating conditions (Dunning, 1980; Porter, 1990) and, over time, the firms’
1525-383X
DOI 10.1108/MBR-07-2018-0048 domestic competitiveness (Erramilli et al., 1997), i.e. the capacity to attain productivity levels
that allows firms to outperform their domestic and foreign rivals (Porter, 1990). Indeed, Impact of
many scholars have recognized that international diversification allows firms to leverage (or home-country
mitigate) various home-country conditions to augment their domestic performance[1]
(Dunning, 1980; Witt and Lewin, 2007). They do so by tapping location-specific advantages
conditions
in host countries and through strategic asset seeking whereby the primary purpose is to
acquire capabilities overseas which can be useful at home (Deng, 2009; Hennart, 2009). In
other words, these firms’ domestic performance (which we measure in terms of change in
365
firms’ domestic productivity)[2] depends upon the interplay between their home-country
conditions and the breadth of their international diversification portfolio (Capar and Kotabe,
2003; Wan, 2005). Nevertheless, previous work has disregarded the noted jointness (i.e.
modeled the relationships independently of each other) – implying that, regardless of home-
country conditions, firms can modify their own domestic productivity merely by
diversifying into international markets. We contest this prevalent view and, instead, argue
that a more agreeable view is one in which firms’ international diversification moderates the
linkage between prevalent home-country attributes and firms’ domestic productivity.
Despite their best endeavors, firms may not be able to pursue international
diversification (and ultimately improve their domestic productivity) if their home
countries fail to provide a minimum “runway” for these firms to expand into
international markets. This is because home-country conditions fundamentally shape
the nature of value-added processes upon which firms rely to gain competitive
advantage (Dunning, 1988; Goerzen and Beamish, 2003; Porter, 1990). Home-country
effects are not only substantial in their “gravity” but also persist regardless of a firm’s
level of multinationality (Makino et al., 2004; McGahan and Victer, 2010). Thus, firms
cannot leverage their firm-specific resources in their quest for superior performance
unless certain baseline conditions exist in these firms’ home countries (Merchant, 2005).
Otherwise, all firms – even those in countries with punishing home-country attributes –
would, in principle, diversify internationally to gain edge over rivals. While some
exceptions do exist, direct investment by firms from countries with the most
impoverished home-country contexts is, indeed, very rare (World Investment Report,
2015). A certain minimum level and quality of home-country attributes seems to be
necessary for a diversification “takeoff” by indigenous firms. A conceptual blueprint
that ignores this empirical reality must therefore be challenged (Bausch and Krist, 2007;
Kim et al., 2015; McGahan and Victer, 2010). Thus, we attempt to recast the prevalent
view on its head, arguing the primacy of home-country conditions – as opposed to
international diversification, as most previous studies have argued. We attempt to
respond to this call.
We argue that international diversification by domestic firms moderates the baseline
domestic productivity impact of these firms’ home-country attributes; such diversification
does not, as previous work implies, “dominate” home-country attributes. We investigate the
above model based on a 20-year longitudinal analysis of 600 observations involving
telecommunication incumbents – firms that have traditionally operated as regulated
monopolies until their market liberalization (Wallsten, 2001) - from 65 countries. After
controlling for possible reverse causality between firms’ international diversification (and
other firm-specific factors) and their domestic productivity, we find – as hypothesized – that
international diversification moderates the baseline performance impact of different home-
country attributes in different ways. Such diversification does not have a uniform
moderating effect on home-country attributes. In other words, the baseline effects of home-
country conditions are altered as indigenous firms become more internationalized.
MBR We attempt to contribute to the current literature theoretically as well as empirically. On
27,4 the theoretical side, we complement existing arguments by investigating the role of
upstream conditions in the “chain of causality” (Porter, 1991) leading to firm performance,
broadly defined. Namely, this focus on home-country – as opposed to host-country –
conditions underscores a departure from previous work (Cuervo-Cazurra, 2011; Luo and
Wang, 2012). Empirically, our study addresses some principal limitations of earlier work,
366 including a focus on singular aspects of home-country dynamics (Tolentino, 2010; Yiu et al.,
2007) or a single-country focus (Peng, 2012; Zhou and Guillén, 2015). Importantly, we
conduct a longitudinal analysis of the phenomenon – thus netting the dynamic nature of
home-country attributes, and extending previous findings (Kim et al., 2015; Makino et al.,
2004; McGahan and Victer, 2010; Zhou and Guillén, 2015). Moreover, our productivity-based
measure of domestic performance (i.e. change in Total Factor Productivity) allows us to
circumvent the limitations of accounting- and/or finance-based performance measures
which are distorted by country-specific differences. Collectively, these endeavors would
facilitate a better understanding of the triumvirate of home-country conditions, international
diversification and domestic productivity (Kim et al., 2015; McGahan and Victer, 2010; Peng,
2012; Zhou and Guillén, 2015).

Theory and hypotheses

Recent work demonstrates that home-country conditions define not only initial operating
conditions faced by indigenous firms but also their organizational trajectory (Luo and
Wang, 2012). These conditions are a critical source of domestic firms’ competitive advantage
(or disadvantage) because they shape these firms’ competitive foundations and,
consequently, long-term performance (Kim et al., 2015; McGahan and Victer, 2010; Peng,
2012; Zhou and Guillén, 2015). Although there is some truth to this perspective, we believe
that it is a fairly static and deterministic view because it under-emphasizes mechanisms that
would permit domestic firms to break away from and/or leverage the initial configuration of
home-country conditions. One such mechanism is international geographical diversification
(Contractor, 2012; Dunning, 1988; Wiersema and Bowen, 2008). Thus, an interesting
question is: to what extent – and how – does international geographical diversification
influence indigenous firms’ baseline domestic productivity, i.e. performance which is initially
defined by home-country conditions?
In the following paragraphs, we argue that international diversification can help
indigenous firms to leverage home-grown advantages as well as circumvent home-based
disadvantages. Further, we suggest that such diversification per se would not necessarily
enhance domestic productivity especially if a particular existing home-country condition(s)
already supports a trajectory of superior firm performance. Thus, we attempt to
theoretically (and empirically) demarcate home-country boundary conditions under which
international diversification augments the domestic productivity of indigenous firms; these
boundary conditions need our collective scrutiny.
Capturing the business environment in a home-country is challenging given the myriad
of locational influences on the indigenous firm’s productivity growth – our focus in this
study. However, it may still be worthwhile to consider (given data availability) variables
that imperfectly proxy the multilevel environment in a home country (Hitt et al., 2007). We
draw on the theory of the competitive advantage of nations (Porter, 1990) and the related
literatures on home-country effects (Belderbos et al., 2013; Bertrand and Capron, 2015;
Capron and Bertrand, 2014; Hawawini et al., 2004; Wan and Hoskisson, 2003)
and the decomposition of the variance of MNEs’ performance (Makino et al., 2004;
McGahan and Victer, 2010) to derive four types of home-country conditions that have been Impact of
most prominent: home-country

factors of production (i.e. land; labor; capital);
conditions

nature of domestic market (i.e. size of market; demand sophistication);

industry competition (i.e. competition in landline markets; competition in mobile
markets); and

quality of local institutions – Figure 1 depicts our conceptual model and research
367
hypotheses.

Factors of production and international diversification

Cross-country variations in resource endowments (i.e. land, labor and capital) represent
diverse bundles of initial opportunities and constraints for home-country firms and define
their competitive actions and eventual success (Li and Yue, 2008; Tong et al., 2008). In a
Ricardian sense, firms’ international competitiveness is a function of home-country
advantages that emanate from cross-country differences in production factors’ availability
and prices and the intensity with which they are used. Domestic firms that intensively use
locally abundant production factors can produce goods relatively cheaply (Makino et al.,
2004). Such access and intensity allows these firms to build product and market capabilities
(Dunning, 1988; Kogut, 1991) that enable them to efficiently transact with other producers
(Wan, 2005). Yet, these home-country based advantages are of limited value to firms because
factor cost advantages usually atrophy quickly (Porter, 1990) and so can support firms’
competitiveness only in the short term. Moreover, not all productive assets are equally
mobile across national borders (Narula, 2012) and even some mobile production factors
cannot be deployed equally well across national and cultural boundaries (Bartlett and
Ghoshal, 1992; Kogut, 1991).
As a factor of production, land’s influence on firm performance is contingent on the industry
context. In the telecommunications industry, this study’s context, the relevant aspect of land for
firm performance is land’s geographical accessibility. For telecommunications firms, less

Factors of production
• Land (geographic accessibility)
• Labor Controls
• Firm-level control
• Capital (cost of)
• Industry-level controls
• Country-level controls
• Temporal controls

Domestic market attributes Η1 (0/+, +, -)

• Market size
• Demand sophistication

Η2 (-, +) Firm’s Domestic Change in Total Factor

Productivity
Industry competition
Η3 (-)
• Competition in fixed-voice segment
• Competition in mobile segment
Η4 (+)

Baseline effect
Institutional quality
• Quality of home-country institutions Moderating effect

Figure 1.
International diversification Research framework
MBR accessible geographies in the country increase the risk of firms’ spatial investments. This is
27,4 because firms must invest in networks of local loops, long distance haul lines and switching
facilities, even before they can provide end-to-end services, and often within a range of
regulatory obligations (Sarkar et al., 1999). These spatially embedded investments are
associated with risk that varies with the quality of home-country’s land geography. Serving
difficult-to-access areas (e.g. mountainous, remote or rugged terrains) is thus an impediment to
368 firm productivity.
International diversification may enable the firm to bolster the productivity advantages
that accrue from a more accessible geography. When the home country is surrounded by
several nations, the firm may expand to neighboring geographies, interconnect with its
home network, and induce domestic productivity growth through the attainment of
substantial network effects (Katz and Shapiro, 1994). Additionally, through diversification,
firms can identify better ways to capitalize on switching technology to direct voice and data
across the home-country’s geography more effectively. Thus, at least in the
telecommunications industry, we expect a positive interaction effect between land
accessibility and international geographic diversification.

H1a. International diversification strengthens the positive baseline impact of home-

country “land accessibility” on the domestic productivity of indigenous firms.
Scholars have widely argued that even that home-country labor is (in principle) generally
mobile, it cannot be deployed equally well across national and/or cultural boundaries
(Bartlett and Ghoshal, 1992). Existing evidence suggests that a home country’s labor market
flexibility increases the efficiency of its MNCs’ operations. Geleilate et al. (2016) find that
MNCs benefit from increased productivity and development of firm-specific capabilities
based on the opportunity to more efficiently adjust their home-country workforce; a home-
country asset that Carnevale et al. (2017) refer to as “Employee distribution.”
International diversification can leverage this constraint. For example, by exposing
indigenous firms to new/novel knowledge combinations and best practices in foreign
markets (Yu et al., 2013), diversification permits firms to apply these capabilities
domestically to upgrade home-country labor quality, innovativeness and output. This
agrees with the view that internationally diversified firms can leverage their foreign
affiliates’ knowledge base to augment organizational learning within the firms’ global
network (Hitt et al., 1997). Essentially, diversification expands firms’ choices about
deploying their home-country labor more efficiently and effectively (Salomon and Jin, 2010)
by enabling access to non-resident labor capabilities. Thus, diversification improves
indigenous firms’ responsiveness to competitive dynamics (Porter, 1990). Additionally,
indigenous firms may reap economies of scale in labor if – through diversification – they can
increase their market share and shift some of the costs of serving these new markets (e.g.
billing services; customer service functions) to their home-country. In other words, the
incremental costs of serving additional international markets may well be quite low for
indigenous firms. For these reasons, we expect that international diversification strengthens
the linkage between home-country labor availability and firm domestic productivity.
Formally:

H1b. International diversification strengthens the positive baseline impact of home-

country “labor availability” on the domestic productivity of indigenous firms.
Likewise, international diversification can weaken the relationship between home-country
cost of capital and indigenous firms’ domestic productivity. Cuervo-Cazurra et al. (2018) note
that MNEs often resort to the escape from their home countries in an attempt to tap into Impact of
broader pools of capital to support investments and to locate their operations in countries home-country
with much lower levels of taxes and transparency. Home-country capital market conditions
imperfections have been shown to influence the internationalization activities of different
types of domestic firms (Voss et al., 2010) and the performance implications of
multinationality (Geleilate et al., 2016).
Even when indigenous firms can avail themselves of favorable terms to acquire capital, 369
diversification facilitates institutional arbitrage (Chacar et al., 2010) that allows firms to
playoff home-country lenders against host-country lenders as a potential source of relatively
inexpensive capital in host-countries with developed financial markets. Such tournaments
gain momentum the more indigenous firms diversify internationally. This is because the
more countries an indigenous firm diversifies to, the greater access it has to a pool of
potential suppliers of low-cost capital and the better off it is (as a “consumer” of capital) in
the face of rivalry among these suppliers (Williamson, 1987). Of course, international
diversification permits indigenous firms to access this larger pool even when home-country
capital markets are unattractive or otherwise generally weak. Under this scenario, firms can
either borrow from foreign capital markets (and eliminate the imperative to borrow
domestically at unfavorable rates) or access home-country capital on favorable borrowing
terms (due to potential threat of competition from foreign lenders). Thus, we expect that
international diversification weakens the relationship between home-country cost of capital
and firm domestic productivity. Formally, we hypothesize the following relationship:

H1c. International diversification weakens the negative baseline impact of home-

country “cost of capital” on the domestic productivity of indigenous firms.

Nature of domestic market and international diversification

Previous research has also identified two salient home-country conditions vis-à-vis their role
in enhancing the domestic productivity of indigenous firms:

size of the domestic market; and

level of demand sophistication in the home-country (Behrens et al., 2009; Li and Yue,
2008).

Indigenous firms benefit from the presence of these conditions in that the latter not only
impel firms to move higher up the competitive food-chain via superior, innovative (domestic)
offerings but also bestow firms with a potential safety net associated with a large domestic
market.
Firms that operate in large domestic markets usually enjoy greater scale and/or learning
economies that enhance these firms’ competitiveness. This is because such markets
augment market specialization (Behrens et al., 2009) by indigenous firms and facilitate their
growth as more efficient competitors (Gal, 2003; Merchant, 2005). Moreover, large domestic
markets encourage indigenous firms to make aggressive strategic investments (e.g. in R&D)
on expectations of higher profitability (Acemoglu and Linn, 2004). Such investments can
lead to an increase in firms’ performance (Porter, 1990). International diversification
amplifies the above-mentioned processes by creating a larger market that indigenous firms
can tap into. Thus, it facilitates lower production costs and enhances operational
efficiencies – both of which translate into domestic productivity gains for domestic firms
(Kobrin, 1991).
MBR Of course, the above-mentioned benefits of diversification would also accrue to
27,4 indigenous firms that operate in small home-country markets. Additionally, for these firms,
diversification can alleviate their dependence on small local markets and weaken the
impositions of a small domestic competitive ecosystem. Indeed, diversification enables
indigenous firms from small home-country markets to be exposed to (Wan, 2005) and/or
develop (Hitt et al., 1997) new/novel product combinations that can generate superior
370 performance. Clearly, regardless of domestic market size, international diversification eases
indigenous firms’ dependency on home-country market size – thus weakening its
relationship with firms’ domestic productivity.
Unlike in the case of home-country market size, international diversification strengthens
the baseline impact of home-country demand sophistication. Demanding markets compel
firms to improve existing offerings and generate a higher value-added for customers (Kirca
et al., 2012; Porter, 1990). This encourages firms to innovate (Von Hippel, 1988) and helps
them to develop a more sustainable competitive advantage (Fabrizio and Thomas, 2012).
Essentially, demand sophistication requires indigenous firms to become more competitive-
savvy or, fundamentally, risk their own survival (Merchant, 2005). Indigenous firms may be
able to achieve both these imperatives through diversification. In countries where demand
sophistication is already high, diversification enables indigenous firms not only to exploit
their current knowledge base but also to upgrade it (Bartlett and Ghoshal, 1992; Salomon
and Jin, 2010). Thus, through international diversification, indigenous firms can leverage the
benefits of home-country demand sophistication and reinforce their own domestic
productivity.
In contrast, when demand sophistication in a host-country is low, diversification would
allow indigenous firms not only to learn from relatively more sophisticated markets and
upgrade their own offerings as well as organizational processes (Hitt et al., 1997) but also to
enable indigenous firms to expand their options to leverage home-country conditions more
efficiently and effectively (Salomon and Jin, 2010). By facilitating better and (presumably)
quicker responses to competitive dynamics (Porter, 1990), diversification would augment the
domestic productivity of firms in home-country markets with finite demand sophistication.
Of course, all this assumes that a home-country minimally has the requisite absorptive
capacity (Cohen and Levinthal, 1990) to internalize such learnings (Barkema et al., 1997). It is
unlikely that diversification per se simply enables indigenous firms to replicate at home
what they have learned elsewhere even if these firms fully understand various best practices
that prevail outside their home-country. It is also unlikely that a low level of home-country
demand sophistication will motivate indigenous firms to diversify abroad due to the
resources these firms would have to spend in competing with more powerful rivals. In other
words, it is less probable that international diversification will negatively impact the
relationship between demand sophistication in the indigenous firms’ home-country and
these firms’ domestic productivity. Formally, we hypothesize the following relationships:

H2a. International diversification weakens the positive baseline impact of home-

country “market size” on the domestic productivity of indigenous firms.
H2b. International diversification strengthens the positive baseline impact of home-
country “demand sophistication” on the domestic productivity of indigenous firms.

Industry competition and international diversification

International diversification also moderates the linkage between home-country industry
competition and the domestic productivity of indigenous firms. As some researchers have
argued, greater competition in home-country markets exerts upward pressures on Impact of
indigenous firms to improve their competitive capabilities and bolster productivity growth home-country
(Merchant, 2005; Porter, 1990). These pressures (especially) compel indigenous firms to seek
and develop more sustainable sources of competitive advantage (e.g. proprietary
conditions
technologies) to prevent atrophy of their market positions (Wan, 2005). In fact, indigenous
firms not only rise to these challenges (Dawar and Frost, 1998) but also attempt to repel
them through international diversification. In principle, diversification permits these firms
to exploit their home-grown advantage in other markets. 371
Although there are exceptions, the challenges of operating in international markets are,
however, not only more diverse but also more complex and more demanding vis-à-vis a
singular home-country context (Merchant, 2014). In other words, home-grown advantages
might not transfer at all to international markets or, at best, transfer at a high cost to
indigenous firms who diversify. Thus, international diversification can – on the contrary –
weaken the gains associated with competitive “gearing up” (Merchant, 2005) required by home-
country industry competition. Indeed, indigenous firms often encounter a different set of
competitors in international markets (Salomon and Jin, 2010), which would require these (home-
country) firms to match their rivals’ capabilities that likely differ from those developed at home.
Consequently, home-country firms are at a competitive disadvantage because the capabilities
they have developed at home often limit them to serving the home-country (Meyer and Estrin,
2014) or markets that are very similar to those at home. Moreover, these firms would need to
learn more – both more quickly and more intensely – when they enter international markets
(Bertrand and Capron, 2015). Such obligations could unnecessarily distract indigenous firms
from their ongoing undertakings, so likely resulting in a decline in competitive performance at
home. Clearly, international diversification exposes indigenous firms to unique “liability of
foreignness” portfolios that degrade the favorable effect of home-country industry competition
on domestic productivity. Formally, we hypothesize the following relationship:

H3. International diversification weakens the positive baseline impact of home-country

“industry competition” on the domestic productivity of indigenous firms.

Institutional quality and international diversification

Another important influence on the domestic productivity of indigenous firms is the quality
of these firms’ home-country institutions. As North (1990) argued, the quality of local
institutions fundamentally defines whether and how countries grow and flourish. As
institutions require long gestation periods to develop – presumably at different rates –
institutional quality varies across countries. Implicitly, because institutions shape
competitive strategies (He and Cui, 2012; Khanna, 2002; Narula and Kodiyat, 2016),
indigenous firms’ diversification to geographies with varying levels of institutional quality
would affect these firms’ growth prospects (Peng and Heath, 1996) as well as performance
(Chacar et al., 2010). Such expansion involves two main trajectories:
(1) going from a high-quality (home-country) institutional context to a low-quality
(host-country) institutional context; and
(2) going from a low-quality (home-country) institutional context to a high-quality
(host-country) institutional context.

For discussion purposes, we ignore the remaining two trajectories presuming that when the
quality of home- and host-country institutions is similar, there is no real impact on
indigenous firms’ domestic productivity (all else being equal).
MBR With respect to the first scenario, it is likely that the routines facilitated by high-quality
27,4 institutional contexts are substantively different than those facilitated by low-quality
contexts. This is because of the former variety of contexts typically engender a more
transparent, rule-entrenched “peace of mind” characteristic that lowers operational
uncertainty for indigenous firms. Of course, diversifying to a context with a relatively lower
level of institutional quality may also offer indigenous firms such a guarantee (Holburn and
372 Zelner, 2010) but one that is likely to be fickle as well as anchored in relatively opaque and
perhaps more arbitrary forms of relief, such as a sympathetic political regime. Being
unaccustomed to institutional degradation now propagated by diversification (as opposed to
existing weak host-country institutions per se), expansion by indigenous firms is unlikely to
facilitate their smooth functioning in such contexts (Merchant, 2014). As a result, these firms
would have to incur higher organizational costs (Gulati and Singh, 1998; Williamson, 1987)
vis-à-vis managing operations in countries to which they have diversified. Consequently, the
overall (i.e. domestic productivity) of these indigenous firms would be compromised due to
international diversification.
However, recent work submits that diversification to low-quality institutional contexts,
in fact, helps – not hinders – firms’ domestic productivity. This happens when indigenous
firms learn from their foreign counterparts who – precisely because of the weak institutional
regime in which they (foreign firms) operate – seek out creative ways to augment their own
performance (The Economist, 2010). To illustrate, such learning often stimulates indigenous
firms from high-quality (home-country) institutional contexts to rethink taken-for-granted
assumptions about resource deployment and/or utilization, develop a sharper competitive
focus, and commit to competitive priorities with a new mindset (Immelt et al., 2009; Khanna
et al., 2007). Such radical rethinking is often attributed to firms’ exposure – often via
diversification – to countries with low-quality institutional contexts (Washburn and
Hunsaker, 2011) and has been shown to improve these firms’ performance in their own
home-country (Bell and Shelman, 2011; Immelt et al., 2009; Merchant, 2005). Indeed, firms
can rely on high-quality institutions at home to leverage their overseas experience/learning
(Bell and Shelman, 2011; Immelt et al., 2009; Martin, 2014). Thus, the supposed degradation
induced by diversification, in fact, augments indigenous firms’ domestic productivity.
In contrast, when indigenous firms in low-quality institutional contexts diversify to
contexts with high-quality institutions (i.e. the second of two trajectories mentioned above),
diversification can offer these firms advantages that bolster the impact of low-quality home-
country institutions so, effectively, reducing their imposition on indigenous firms’ domestic
productivity. To illustrate, international diversification generates a “professionalization
effect” (Kwok and Tadesse, 2006) whereby exposure to competitively “superior” host-
country practices inspires organizational debates about how to strengthen business routines
at home (Landau et al., 2016), essentially becoming a catalyst for upgrading organizational
systems (e.g. governance protocols) and, eventually, performance (Wan and Hoskisson,
2003). Such exposure can also contribute to a general proclivity to enhance (low-quality)
home-country institutions (Keller and Yeaple, 2009; Milner, 1987) that, in future, would also
better support the domestic productivity of indigenous firms. Clearly, in the case of both
above-mentioned trajectories, international diversification moves indigenous firms towards
a higher level of their (domestic) productivity. Formally, we hypothesize the following
relationship:

H4. International diversification strengthens the positive baseline impact of home-

country “institutional quality” on domestic productivity of indigenous firms.
Methods Impact of
Industry selection home-country
We focused on the telecommunications industry to investigate the moderating role of firms’
international (geographic) diversification vis-à-vis the relationship between home-country
conditions
conditions and indigenous firms’ performance. This industry is an ideal setting for our
research question. Traditionally defined by national incumbent firms who operated as
regulated monopolies, this industry has faced tremendous liberalization worldwide over the
past 20þ years (Wallsten, 2001). To remain profitable (and even survive), firms in this
373
industry have had to undertake international expansion – based largely on advantages they
have developed in their home-country (Ros, 1999). Thus, this industry can be seen as a
natural experiment to better understand the conditions under which international
geographical diversification has augmented the domestic productivity of
(telecommunication) firms.

Sample selection
We developed our sample from a universe of 196 countries reported by International
Telecommunications Union (ITU), the United Nations agency for information and
communication technologies (ICTs). For every sample country, we identified the national
incumbent firm and collected firm-level data and market performance data from firms’
annual reports and company and government websites. This resulted in an initial sample of
97 firms, one each from 97 countries worldwide. We deleted 13 firms/countries from this
group due to missing data on variables of interest to our study. Moreover, we deleted the
USA because the former national incumbent, AT&T, was divested in 1984 into seven
separate regional operating companies (in a series of mergers and acquisitions these
companies have recombined into three independent companies). This reduced the sample to
83 firms/countries. Because many of these data sources were only available in the firms’
home-country language, we relied on multilingual coders (with a collective fluency in ten
languages) as well as online tools (e.g. Google’s online translation service) to translate
native-language data into English. For reliability, we reverse-translated the data for
accuracy. We deleted eight more firms due to lack of reliable translation and/or incomplete
firm-level data, and cross-checked our data with that in the ITU’s World
Telecommunication/ICT Indicators database. Our checks did not flag any potential
concerns.
For the remaining 75 firms, we obtained country-level data from:

World Bank’s World Development Indicators database;

ITU’s World Telecommunications/ICT Indicators database; and

United Nation’s Human Development Reports.

Missing country-level data reduced our sample by another five firms. Finally, we discarded
five more firms because of our inability to differentiate between these firms’ domestic and
multinational performance. The above criteria yielded a final sample of 65 national telecom
firms (one each from 65 countries) with available data for up to 20 years (1991 through 2010).
This resulted in a final sample of 600 observations. Appendix contains the distribution of
firms in our sample.

Variable description and operationalization

Dependent variable. Table I describes all variables included in our study. Our dependent
variable is firm performance which we define as the capacity to attain productivity levels
 27,4

374
MBR

Table I.

variables
independent
Description of
dependent and
Variables Operationalization Data source

Dependent variable
Change in Total factor productivity Change in the ratio of a firm’s aggregate (domestic) output to its aggregate (domestic) input; Company annual reports, Government
Estimated using the Data Envelopment Analysis technique reports, and International
Telecommunications Union (ITU) data
Independent variables
Factors of production World Bank Economic Indicators
Land (geographic accessibility) Ratio of home-country’s total arable area to total land World Bank Economic Indicators
Labor Ratio of home-country’s total eligible-to-work labor force to total adult population World Bank Economic Indicators
Capital Home-country’s borrowing rate for local government-issued 10-year bonds World Bank Economic Indicators
Nature of domestic markets Home-country’s total population (in millions) World Bank Economic Indicators
Size of domestic market Ratio of number of graduates (per 100,000) with tertiary education to home-country’s total Company annual reports, ITU
Demand sophistication population Company annual reports, ITU
Industry competition Firm’s market share (reverse-coded) in fixed-voice segment World Bank Economic Indicators
Competition in the fixed-voice Firm’s market share (reverse-coded) in mobile telephony segment Company annual reports
telephony segment Ranking of home-country’s institutional quality based on a composite index of six indicators.
Competition in the mobile Lower scores indicate lower institutional quality and vice versa
telephony segment Number of countries in which a firm operated in a given year
Quality of local institutions
International diversification

Control variables (Industry-specific)

Private ownership in government-owned
firms
Number of market segments which an
indigenous firm serves
Percentage of private equity held by private firms in the focal firm Company annual reports, ITU
Rationale: Private participation in former government-owned firms improves these firms’
productivity (Dewenter and Malatesta, 2001)
Dummy variables that indicate whether a firm operates in fixed-voice segment, mobile- Company annual reports, ITU
telephony segment, or both these segments; Base = Fixed-voice segment
Rationale: Firms that serve both market segments may exhibit superior performance due to the
higher potential to exploit scale/scope economies. Firms that serve only one of these segments
may develop superior competitive insights

Control variables (Industry-specific)

Presence of a national regulatory agency in a Dummy variable that indicates the presence of a national (telecommunications) regulatory ITU
firm’s home-country agency in home-country
Rationale: Regulatory guardianship reflects telecom industry’s strategic importance to national
economic development (Röller and Waverman, 2001), and affects the industry’s as well as
incumbent firms’ performance (Edwards and Waverman, 2006)
(continued)
Variables
Control variables (Home-country-specific)
Education expenditure in the firm’s home-
country
Home-country GDP per capita
Life expectancy in the firm’s home-country
Home-country technological environment
High-technology exports
Patents per capita
Home-country’s openness to international
trade
Control variables (Other)
Time effects
Table I.
Operationalization Data source
Ratio of home-country’s total education expenditure to the country’s gross national income World Bank Economic Indicators
Rationale: Education systems influence employees’ as well as firms’ preparedness/attitude
towards competitiveness and nurture the creation and leveraging of factors of production
(Porter, 1990). Moreover, education influences consumer sophistication (Staelin, 1978)
Home-country’s gross domestic product per capita (in million US$) World Bank Economic Indicators
Rationale: Higher GDP levels signal greater and more sophisticated demand which, in turn, can
influence firms’ competitiveness
Average life expectancy (in years) in home-country World Bank Economic Indicators
Rationale: Greater life-expectancy indicates the quality of a country’s human capital; it implies a
healthier, more productive labor force (Bloom, Canning, and Sevilla, 2004) that can contribute to
indigenous firms’ competitiveness
Ratio (percentage) of home-country’s high-technology exports to total manufactured exports World Bank Economic Indicators
Number of home-country’s patent applications per capita World Bank Economic Indicators
Rationale: Embeddedness of firms in their home-country (technological) ecosystem (Narula,
2012) can play an important role in their competitiveness and firm performance. These variables
denote various knowledge bases which underscore indigenous firms’ competitiveness in
technology- and skills-intensive activities (Hill and Fong, 1991)
Ratio of a home-country’s total exports plus imports to its gross domestic product World Bank Economic Indicators
Rationale: Trading openness promotes efficient allocation of human/capital resources and
increases their productivity (Bos, Economidou, Koetter, and Kolari, 2010). Moreover, it
facilitates knowledge and technological progress (Lee, Ricci, and Rigobon, 2004)
Dummy variables to indicate the period to which a focal observation belongs: 1991-1995, 1996- Created by authors
2000, 2001-2005, and 2006-2010 (Base)
Rationale: unobserved time-specific effects (Bertrand and Capron, forthcoming). Moreover, our
sample’s inter-temporal nature can give rise to serial correlation and degrade the efficiency of
regression estimators (Wooldridge, 2002)
home-country
conditions
375
Impact of
MBR that allow firms to outperform their domestic and foreign rivals. Thus, there is a strong
27,4 element of how (internationally) competitive indigenous firms really are (Porter, 1990). We
operationalize this capacity as the change in Total Factor Productivity (TFP) of a firm’s
domestic operations, i.e. change in the ratio of a firm’s aggregate (domestic) output to its
aggregate (domestic) input.
Our measure has several merits. One, it captures the inter-temporal nature of firm
376 performance and yields a better understanding of the phenomenon under study (Yoffie and
Milner, 1989). Two, it admits a broad base of performance drivers (e.g. knowledge creation/
application, technological dexterity, and managerial ability) as firms’ competitiveness also
depends upon their ability to develop, nurture and leverage such drivers – here, via
international diversification – in addition to home-country conditions (Chen et al., 2015).
Three, it circumvents performance distortions caused due to governmental intervention
(Chan et al., 2008) in strategic industries including the telecommunication industry;
indigenous firms in such industries may well “show” accounting/finance profitability even
if, in reality, they are losing their competitiveness (Porter, 1990). Finally, our measure
circumvents worldwide differences in accounting/finance reporting standards that make it
difficult to meaningfully compare cross-national variation in firm performance. Above all,
the above operationalization agrees with our view that, at least in the telecom industry,
home-country conditions provide a critical base upon which indigenous firms develop initial
capabilities that influence their competitive advantage and, ultimately, performance
(Belderbos et al., 2013). This view is grounded in the theory of the competitive advantage of
nations (Porter, 1990), which posits that home-country conditions affect indigenous firms’
competitive advantage through their influence on firms’ productivity growth.
We operationalized our dependent variable, change in Total Factor Productivity (TFP),
based on O’Donnell (2008; 2014) who devised an index of change in firms’ TFP. This index
relies on “aggregator functions” (Färe and Primont, 1994) which are used to make reliable
TFP comparisons for multiple periods and firms. Accordingly, if xit=(x1it,. . ., xKit) and qit=
(q1it,. . ., qJit) respectively denote the input and output quantity vectors of firm i in period t, a
firm’s TFP is given by:

Qit
TFPit  (1)
Xit

where Qit = Q(qit) is an aggregate output, Xit = X(xit) is an aggregate input, and Q(.) and X(.)
are respective non-negative, non-decreasing and linearly homogenous output and input
aggregator functions. By extension, the index that measures firm i’s TFP in period t relative
to firm i’s TFP in period t1 is given by:
Qit

TFPit X Qit;it1
TFPit;it1  ¼  it ¼ (2)
TFPit1 Qit1 Xit;it1
Xit1

where Qit,it1 = Qit/Qit1 is an output quantity index and Xit,it1=Xit/Xit1 is an input

quantity index. Thus, change in TFP is expressed as the ratio of a firm’s aggregate
(domestic) output change to its aggregate (domestic) input change.
We estimated firms’ change in TFP using the DPIN software (O’Donnell, 2008;
O’Donnell, 2014). This software uses data envelopment analysis (DEA) to estimate firms’
underlying production function and, consequently, the index of TFP change for firms.
Importantly, the methodology does not require any assumptions concerning either the
degree of competition in product-markets or the behavior of firms. This non-restrictiveness Impact of
is particularly crucial for our study because firms in our sample are located in different home-country
home countries and experience varying levels of rivalry and regulatory scrutiny. We
estimated a multi-input, multi-output production function with two inputs (Number of
conditions
employees; Capital expenditure[3]) and two outputs (Number of mobile subscriptions;
Number of fixed lines)[4]. Given page constraints, additional details about the construction
of our dependent variable are available upon request.
Independent variables. We used five independent variables, including some with multiple 377
indicators, to test our hypotheses.
(1) Factors of production. Following previous work (Alesina and Spolaore, 2003;
Alesina and Wacziarg, 1998; Armstrong and Read, 1995), we identified three
salient factors of production: land, labor and capital. With regard to “land,” we are
interested in land’s geographic accessibility, which we operationalize as the ratio of
a home-country’s total arable area to total geographical area. Arable land, i.e. land
worked regularly, is a form of terrain that is more accessible than other forms of
terrain of a home-country’s geography such as mountainous landscapes and
remote or rugged terrains. Higher values of this ratio represent a lower risk
associated with telecom firms’ spatial investments (Sarkar et al., 1999; Symeou and
Pollitt, 2014). We operationalized “labor” as the ratio of a home-country’s total
(eligible-to-work) labor force to total adult population. We operationalized ‘cost of
capital’ in terms of a home-country’s borrowing rate for local government-issued
10-year bonds. This rate reflects the cost of capital for the overall economy and, by
extension, the baseline cost for indigenous firms to access capital in their home-
country.
(2) Nature of domestic markets. Our literature search also identified two salient
attributes of home-country markets: market size, and demand sophistication
(Behrens et al., 2009; Li and Yue, 2008; Porter, 1990). We measured “market size” in
terms of the home-country’s total population (Alesina and Wacziarg, 1998) because
a larger population implies a larger potential demand as well as greater potential
for scale economies, both of which are important for firms’ performance
(Armstrong and Read, 1995). We measured ‘demand sophistication’ in a firm’s
home-country as the ratio of the number of graduates (per 100,000) with tertiary
education to the home-country’s total population (Estrin et al., 2009; Meyer and
Estrin, 2014). A population with post-secondary education denotes sophisticated
consumers (Fabrizio and Thomas, 2012) and underscores a more advanced,
quality-sensitive market that can stimulate innovation (Von Hippel, 1988; Porter,
1990) and, ultimately, firm performance.
(3) Industry competition. Firms in the telecoms industry have – historically – operated
in heavily-protected national contexts that were (de facto) regulated as instruments
of strategic government policy (Newbery, 1999; Symeou and Pollitt, 2014). National
policies have often dictated which telecoms firms could compete in which specific
telecoms segment(s), and also when, how, and under what conditions these firms
could/can compete (Edwards and Waverman, 2006). Thus, we would argue market
shares gained under government-created conditions should be viewed as home
country-driven outcomes. In other words, firms’ market share trajectories in the
telecoms industry fundamentally arise from home country-anchored conditions.
We measured the level of industry competition in a firm’s home-country in terms of
the firm’s market share (reverse-coded to aid interpretation) in the two main
MBR segments, fixed-voice and mobile telephony (Barros and Seabra, 1999; Ros, 1999).
27,4 The market-share variables facilitate a better understanding of the effects of
competitive pressures in a given market segment (Symeou, 2011) and, ultimately,
on firm performance (Merchant, 2005)[5].
(4) Quality of local institutions. We measured home-country’s institutional quality as a
composite index made up of six indicators: control of corruption, government
378 effectiveness, political stability and absence of violence/terrorism, regulatory
quality, rule of law and voice and accountability. Details about these individual
indicators are available upon request. The Cronbach’s alpha of 0.96 suggested that
the six indicators could be meaningfully combined into a single index. We rank-
ordered this index to categorize a home-country’s institutional quality relative to
all other countries in our sample. Thus, a rank of 1 denoted a home-country with
lowest institutional quality.
(5) International diversification. Following considerable precedent (Barkema and
Vermeulen, 1998; Hitt et al., 1997; McGahan and Victer, 2010; Wan and Hoskisson,
2003), we operationalized firms’ international (geographical) diversification as the
number of countries in which firms had their operations in a given year. This
measure of internationalization “breadth” has been widely used in previous work
(Kirca et al., 2012). We relied on this measure for several reasons. One, at least two
meta-analytic studies have concluded that the more complex international
diversification proxies do not better explain its relationship with firm performance
(Bausch and Krist, 2007; Hitt et al., 2006). Two, several studies report that the
traditional “count” measures of international diversification are strongly correlated
with its more complex variants (Goerzen and Beamish, 2003). Finally, several firms
in our sample did not report the detailed country-level data needed to compute a
more complex measure of international diversification.

Controls. We used nine variables to control for the potential impact of other home-country,
industry- and firm-specific variables on firm performance. We chose these variables based
on five criteria:
(1) relevance to our research question;
(2) relevance to telecommunication industry, our study’s focus;
(3) potential for confounding empirical results;
(4) empirical precedence; and
(5) data availability. Given constraints on manuscript length, we report their
operationalization in Table I and provide a brief theoretical rationale for including
these control variables.

Additional details about these variables are available upon request. These control variables
are:

private ownership in government-owned firms;

presence of a national regulatory agency in a firm’s home-country;

number of market segments which an indigenous firm serves;

education expenditure in a firm’s home-country;

home-country GDP per capita;

life expectancy in a firm’s home-country;

home-country technological environment; Impact of

home-country’s openness to international trade; and home-country

time effects. conditions
Statistical methods. Given our sample’s longitudinal nature, we used panel data techniques
to test our hypotheses. We ascertained the statistical appropriateness of specifying a
random-effects (as opposed to a fixed-effects) model, and found support for our specification; 379
the Hausman statistic was not significant at the 5 per cent level suggesting that our
specification produced the most efficient/consistent beta estimates (Wooldridge, 2002). Next,
we tested for the cross-sectional independence of residuals and found that the models we
estimated violated this critical assumption. Consequently, per Baum (2006)’s
recommendation, we re-estimated our models using the feasible generalized least squares
(FGLS) regression technique. This method uses data transformations to allow robust
estimation in the presence of auto-correlation within panels, and cross-sectional correlation
and heteroskedasticity across panels.
We ran six separate regression models to test our hypotheses. Model 1, our base model,
included variables representing various home-country conditions, international
diversification and controls; this model did not include any interaction effects. Models 2
through 5 each included the above-mentioned variables plus each of the (four) interaction
effects between international diversification and variable(s) representing a particular home-
country condition. Model 6, our final model, included all main effects and all interaction
effects. The inclusion of interaction terms in this model indicated multi-collinearity so,
following Wan and Hoskisson (2003), we re-estimated all models after centering the main
effects and then defined all interaction terms based on this centering. A check of variance
inflation factors indicated that multicollinearity was – as expected – no longer a problem. To
be consistent with our intent to isolate the incremental effect of interaction terms, we entered
interaction variables after entering the primary and control variables.
In our models, we entered all variables – except the dummy variables for time – with a
one-year lag. In contrast, we entered international diversification with a two-year lag to
alleviate concerns about reverse causality between international diversification and firm
performance. Thus, all interaction terms represent the product of home-country conditions
at time t1 and international diversification at time t2. The antecedence of international
diversification vis-à-vis home-country conditions also enables us to attribute the estimated
interaction effects to changes in an indigenous firm’s international diversification at a given
level of its home-country condition instead of the other way around. Moreover, we explicitly
account for potential endogeneity in a separate econometric analysis (See next section).

Empirical results and robustness checks

Table II reports descriptive statistics, whereas Table III presents regression results. In
general, Table III highlights the robust effect(s) of independent as well as control variables
across the study’s six regression models. Although not of direct interest to our study, most
relationships between independent variables and our performance measure (i.e. main effects)
are significant below the 10 per cent level and in the expected direction.
The findings reported in Table III provide mixed support for our hypotheses. The results
partially support our first set of hypotheses about the moderating role of international
diversification vis-à-vis the relationship between home-country factors of production (i.e.
land; labor; capital) and firm’s domestic productivity. The coefficient for the interaction
between diversification and geographic accessibility (i.e. H1a) is, as expected for the
telecommunications industry, both positive and significant (beta = 0.0168; p < 0.001). The
 27,4

380
MBR

Table II.
Descriptive statistics
Mean S.D. (1) (2) (3) (4) (5) (6) (7) (8) (9)

(1) Change in Total factor productivity 0.80 0.70 1.00

(2) Factor of production: Land (geogr. accessibility) 0.17 0.14 0.00 1.00
(3) Factor of production: Labor 0.46 0.06 0.38* 0.09* 1.00
(4) Factor of production: Capital 7.36 6.17 0.12* 0.03 0.08 1.00
(5) Nature of domestic market: Market size 35.30 103.00 0.23* 0.03 0.32* 0.00 1.00
(6) Nature of domestic market: Demand sophis. 0.034 0.015 0.14* 0.09* 0.08* 0.16* 0.13* 1.00
(7) Industry competition: Fixed-voice segment 0.81 0.28 0.32* 0.10* 0.31* 0.10* 0.22* 0.10* 1.00
(8) Industry competition: Mobile segment 0.43 0.30 0.14* 0.02 0.32* 0.22* 0.13* 0.07 0.23* 1.00
(9) Quality of local institutions 65.53 22.18 0.09* 0.21* 0.25* 0.22* 0.21* 0.31* 0.16* 0.27* 1.00
(10) International diversification 1.69 3.04 0.07 0.13* 0.18* 0.15* 0.04 0.16* 0.06 0.17* 0.39*
(11) Private ownership in govt.-owned firms 24.86 26.36 0.34* 0.08* 0.31* 0.06 0.15* 0.24* 0.24* 0.04 0.29*
(12) Presence of national regulatory authority† 45 0.38 0.07 0.02 0.01 0.03 0.18* 0.13* 0.01 0.05 0.10*
(13) Number of market segments (Fixed, Mobile) 0.88 0.38 0.27* 0.06 0.08 0.16* 0.11* 0.17* 0.19* 0.31* 0.20*
(14) Education expend. in a firm’s home-country 0.46 0.14 0.13* 0.03 0.37* 0.12* 0.31* 0.18* 0.16* 0.13* 0.40*
(15) Home-country GDP per capita 13469.55 13098.64 0.01 0.13* 0.02 0.28* 0.07 0.31* 0.21* 0.19* 0.31*
(16) Life expectancy in a firm’s home-country 73.60 6.33 0.08* 0.17* 0.04 0.25* 0.03 0.33* 0.27* 0.19* 0.37*
(17) Home-country tech. env.: High-tech. exports 11.56 12.89 0.16* 0.21* 0.17* 0.16* 0.16* 0.13* 0.25* 0.11* 0.20*
(18) Home-country tech. env.: Patents per capita 0.00 0.01 0.05 0.05 0.39* 0.11* 0.07 0.16* 0.03 0.19* 0.07
(19) Home-country’s openness to int’l trade 0.89 0.37 0.18* 0.31* 0.37* 0.20* 0.25* 0.05 0.25* 0.17* 0.15*
(20) Time effects‡ 3.27 0.75 0.30* 0.01 0.01 0.21* 0.06 0.13* 0.08 0.03 0.08*

Notes: *Statistically significant at the 5% level; †This is a dummy variable; The mean value suggests that, by 2010, there were 45 firms in the sample whose
home country had established a National Regulatory Authority in the telecommunications industry; ‡Time effects refer to four 5-year windows: 1991-1995, 1996-
2000, 2001-2005, 2006-2010; Values for all economic measures were converted to PPP (Constant 2005 international dollars); Categories of control variables: Firm-
level controls = Variables 11 and 13; Industry-level control = Variable 12; Home country-level controls = Variables 14 to19
(continued)
 (10) (11) (12) (13) (14) (15) (16) (17) (18) (19) (20)

(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10) 1.00
(11) 0.36* 1.00
(12) 0.11* 0.17* 1.00
(13) 0.16* 0.23* 0.13* 1.00
(14) 0.15* 0.02 0.02 0.11* 1.00
(15) 0.34* 0.34* 0.05 0.28* 0.29* 1.00
(16) 0.37* 0.37* 0.00 0.31* 0.04 0.64* 1.00
(17) 0.11* 0.35* 0.01 0.20* 0.03 0.23* 0.19* 1.00
(18) 0.06 0.19* 0.05 0.07 0.16* 0.07 0.04 0.04 1.00
(19) 0.14* 0.21* 0.03 0.03 0.24* 0.03 0.01 0.16* 0.18* 1.00
(20) 0.08* 0.12* 0.28* 0.09* 0.06 0.16* 0.02 0.05 0.04 0.18* 1.00
home-country
conditions

381
Impact of

Table II.
 27,4

382
MBR

Table III.
Regression results
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Dependent variable: change Base model Factors of production Nature of dom. mkts. Industry competition Institutional quality Full model
in total factor productivity Coeff./SE Coeff./SE Coeff./SE Coeff./SE Coeff./SE Coeff./SE

Main effects
Factors of production
Landt1 0.0241* (0.0108) 0.0321*** (0.0094) 0.0170 (0.0110) 0.0381*** (0.0098) 0.0347** (0.0108) 0.0504*** (0.0100)
Labort1 0.0233 (0.0155) 0.0271† (0.0147) 0.0305* (0.0152) 0.0143 (0.0149) 0.0303† (0.0157) 0.0215 (0.0160)
Capitalt1 0.0012 (0.0011) 0.0029** (0.0011) 0.0010 (0.0011) 0.0012 (0.0012) 0.0012 (0.0011) 0.0011 (0.0015)
Nature of domestic markets:
Size of domestic markett1 0.0018** (0.0006) 0.0012* (0.0005) 0.0005 (0.0006) 0.0017** (0.0005) 0.0010 (0.0006) 0.0034*** (0.0009)
Demand sophisticationt1 0.0793*** (0.0096) 0.0747*** (0.0098) 0.0815*** (0.0096) 0.081*** (0.0094) 0.0731*** (0.0098) 0.105*** (0.0097)

Industry competition
Fixed-voice segment-1 0.2395*** (0.0663) 0.1954*** (0.0586) 0.2575*** (0.0701) 0.1904** (0.0682) 0.2661*** (0.0671) 0.1712** (0.0655)
Mobile telephony segment-1 0.2476*** (0.0441) 0.2240*** (0.0420) 0.2387*** (0.0452) 0.2389*** (0.0448) 0.2413*** (0.0439) 0.2801*** (0.0441)
Quality of local institutionst1 0.0013 (0.0009) 0.0017* (0.0008) 0.0009 (0.0009) 0.0020* (0.0008) 0.0020* (0.0009) 0.0037*** (0.0009)
International diversificationt-2 0.0082* (0.0038) 0.0191*** (0.0041) 0.0186** (0.0067) 0.0056 (0.0037) 0.0464*** (0.0081) 0.0236 (0.0152)

Interaction effects
Factors of production
Int’l diversificationt2 * 0.0064* (0.0025) 0.0168*** (0.0038)
Landt1 (H1a)
Int’l diversificationt 2 * 0.0041† (0.0025) 0.0235*** (0.0066)
Labort1 (H1b)
Int’l diversificationt 2 * 0.0020*** (0.0006) 0.0002 (0.0010)
Capitalt1 (H1c)

Nature of domestic markets

Int’l diversificationt-2 * 0.0009* (0.0004) 0.0121*** (0.0035)
Market sizet1 (H-2a)
Int’l diversificationt-2 * Dem. 0.0087* (0.0034) 0.0089* (0.0044)
sophis.t1 (H-2b)
Industry competition
Int’l diversifi.t-2 * Fixed-voice 0.0666*** (0.0165) 0.0070 (0.0234)
segmentt1 (H-3)
(continued)
 Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Dependent variable: change Base model Factors of production Nature of dom. mkts. Industry competition Institutional quality Full model
in total factor productivity Coeff./SE Coeff./SE Coeff./SE Coeff./SE Coeff./SE Coeff./SE

Int’l diversifi.t2 * Mobile 0.0017 (0.0112) 0.0445† (0.0237)

segmentt1 (H3)
Int’l diversifi.t-2 * Qual. of 0.0017*** (0.0003) 0.0029*** (0.0004)
local institutiont1 (H4)
Control variables (Firm-specific)
Private ownership in 0.0023*** (0.0004) 0.0029*** (0.0004) 0.0019*** (0.0005) 0.0030*** (0.0004) 0.0022*** (0.0005) 0.0024*** (0.0004)
government-owned firmst1
Number of market segments
Fixedvoice and 0.0519 (0.0379) 0.0617† (0.0366) 0.0783* (0.0389) 0.0791* (0.0386) 0.0521 (0.0380) 0.0705† (0.0386)
Mobiletelephony segments
Mobiletelephony segment 1.1173*** (0.1325) 1.2282*** (0.1287) 1.2360*** (0.1428) 1.1412*** (0.1483) 1.1250*** (0.1326) 1.0745*** (0.1567)
only
Controls (Industry-specific)
Presence of a national 0.0753*** (0.0180) 0.0764*** (0.0179) 0.0690*** (0.0181) 0.0679*** (0.0183) 0.0719*** (0.0185) 0.0803*** (0.0181)
regulatory agency-1
Controls (Home country-specific)
Education expend. in the 0.0160† (0.0086) 0.0160† (0.0082) 0.0129 (0.0090) 0.0140 (0.0092) 0.0163† (0.0085) 0.0224* (0.0091)
firm’s home-countryt1
Home-country GDP per 0.0052*** (0.0015) 0.0043*** (0.0013) 0.0048** (0.0016) 0.0034* (0.0014) 0.0040** (0.0015) 0.0073*** (0.0014)
capitat1
Life expectancy in the firm’s 0.0063 (0.0044) 0.0065 (0.0044) 0.0048 (0.0044) 0.0076 (0.0047) 0.0038 (0.0045) 0.0043 (0.0047)
home-countryt1
Home-country technology environment
Hightechnology exportst1 0.0051*** (0.0011) 0.0060*** (0.0010) 0.0052*** (0.0011) 0.0067*** (0.0010) 0.0045*** (0.0011) 0.0046*** (0.0011)
Patents per capitat1 0.4612 (1.8640) 1.8124 (1.7034) 1.5812 (1.8121) 1.0926 (1.9547) 0.2087 (2.2576) 0.8053 (1.9535)
Home-country’s openness to int’l 0.0009** (0.0003) 0.0008** (0.0003) 0.0007* (0.0004) 0.0005 (0.0003) 0.0007* (0.0003) 0.0010** (0.0004)
tradet1
(continued)

Table III.
home-country
conditions

383
Impact of
 27,4

384
MBR

Table III.
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Dependent variable: change Base model Factors of production Nature of dom. mkts. Industry competition Institutional quality Full model
in total factor productivity Coeff./SE Coeff./SE Coeff./SE Coeff./SE Coeff./SE Coeff./SE

Control variables (Other)

Time effects:
1991  1995 0.1669* (0.0686) 0.1658* (0.0679) 0.1603* (0.0709) 0.1765* (0.0712) 0.1845** (0.0675) 0.1974** (0.0691)
1996  2000 0.1206*** (0.0219) 0.1351*** (0.0214) 0.1231*** (0.0229) 0.1452*** (0.0225) 0.1182*** (0.0223) 0.1335*** (0.0228)
2001  2005 0.0535*** (0.0123) 0.0594*** (0.0123) 0.0590*** (0.0128) 0.0609*** (0.0125) 0.0457*** (0.0127) 0.0622*** (0.0131)
Constant 0.0367 (0.3302) 0.0452 (0.3252) 0.1235 (0.3292) 0.0430 (0.3464) 0.2233 (0.3290) 0.2352 (0.3419)
Number of observations 600 600 600 600 600 600
Number of firms 65 65 65 65 65 65
Chi-square 594.76 704.22 558.20 783.49 568.90 762.87

Notes: †p < 0.1; * p < 0.05; **p < 0.01, *** p < 0.001; For the dummy variable “Number of market segments,” the base category is Fixed-voice market segment;
For the dummy variable “Time effects,” the base category is 2006-2010; “Demand sophistication”, “Size of domestic market” and GDP per capita are multiplied by
1,000 so that their estimated effects are presented in four decimal digits
coefficient for the interaction with home-country labor (i.e. H1 b) is, as expected, also Impact of
positive (beta = 0.0235; p < 0.001). However, the interaction involving home-country’s cost of home-country
capital (i.e. H1c) is not significant at the 10 per cent level. Thus, we find partial support for
H1. We attempt to explain this divergence in the discussion section below.
conditions
In contrast, the results in Table III fully support our second set of hypotheses regarding
the moderating role of international diversification vis-à-vis the domestic productivity
impact of the nature of domestic markets. As expected, international diversification
negatively moderates the market size-performance linkage (beta = 0.0000; p < 0.001; i.e.
385
H2a), and positively moderates the relationship between demand sophistication and
domestic productivity (beta = 0.0000; p < 0.05; i.e. H2b). H3 predicted that international
diversification would negatively moderate the linkage between industry competition in
home-country and firm’s domestic productivity. Although the moderating effect of such
diversification is not significant below the 10 per cent level for the fixed-voice segment, it is
in the expected direction for the mobile telephony segment (beta = 0.0445; p < 0.10). Thus,
our findings provide partial support H3. We offer a possible reason for this result in our
discussion section. Finally, the results in Table III support H4 which predicted that
diversification augments the relationship between home-country institutional quality and
firm’s domestic productivity (beta = 0.0029; p < 0.001).

Robustness checks
Recall that the above-mentioned findings are based on regressing firms’ domestic
productivity on two-year lagged values of the “International diversification” variable.
Although this lag should minimize concerns about the reverse effect of performance on
firms’ international geographical diversification, it could still be argued that such
diversification is motivated by prior favorable home-country conditions (Kim et al., 2015).
That is, it is possible that firms expand their geographic scope internationally to exploit
(mitigate) a home-grown advantage (disadvantage). Put differently, given the noted
endogeneity, international diversification may correlate with the error term and result in
biased and inconsistent estimates. Hence, endogeneity issues need to be addressed
explicitly.
The most common solution to potential endogeneity issues is to re-estimate the model(s)
via the two stage least squares (TSLS) technique. TSLS draws on “instrumental variables”
to correct for the coefficients’ bias under the OLS estimation procedure (Wooldridge, 2002)
and produces consistent estimates. To conduct a TSLS analysis, we created a new
instrumental variable, “foreign markets,” which measured the number of foreign countries
that had, in a given year, liberalized either their fixed-voice or mobile-telephony market
segments. This is relevant to firms’ geographical diversification because as countries
liberalized their telecom industry, new internationalization opportunities were created. This
measure not only agrees with our intent but also meets all requirements of an appropriate
instrument variable for international diversification. One, “foreign markets” does not belong
to our empirical model. Two, the number of liberalized foreign telecom markets in a given
year is highly correlated with our relevant endogenous variable, international diversification
(i.e. the number of countries in which the firm operates). Finally, it is very unlikely that the
number of foreign markets available for potential market entry either directly affects firms’
performance or correlates with the error term. In general, the new findings were consistent
with those reported in Table III (i.e. findings based on the OLS estimation method), albeit
sometimes with minor differences in the statistical significance of individual effects. This
correspondence suggests – importantly – that our original results are not sensitive to
MBR potential reverse causality between firms’ performance and their international
27,4 diversification[6].
As an additional precaution and to further confirm the robustness of our original
findings, we conducted several other sensitivity checks and additional analyses. First, we
operationalized international diversification in terms of domestic firms’ international
experience (cumulative number of years of presence in foreign markets in a given year)
386 because the latter is a good approximation of internationalization depth – a major aspect
of internationalization process. This is consistent with the view that years of foreign
presence reflect knowledge accumulation in global markets. The two operationalizations
were strongly correlated (r = 0.86; p < 0.05). Second, we looked for – but did not find – a
curvilinear relationship between international diversification and international
competitiveness; the squared “international diversification” term was not significant at
the 5 per cent level and was excluded to save degrees of freedom. Three, we substituted
our dependent variable (change in total factor productivity) with total factor
productivity. The results were similar with the initial analysis and the statistical
significance of a number of parameters was improved. Four, we created a new
operationalization of land’s geographical accessibility by taking the ratio of the total
length (in Kms) of paved roads in the country to the total geographical area. The
underlying logic is that a more extensive road network suggests greater accessibility in
the country. The two alternative measures of geographic accessibility correlated highly
(r = 0.46; p < 0.05), and though there were major missing values of the new variable, the
results were very similar to the main analysis. Finally, we examined our models’ ability
to capture more nuanced aspects of human capabilities in a home-country. We collected
data for a newly constructed measure of human capital based on the Human Capital
Report (World Economic Forum, 2013) for available countries for 2013 (the only available
year). We examined the correlation(s) between variables used in our analysis and those
used to develop the above measure (i.e. education expenditure; GDP per capita; life
expectancy; patents per capita; and labor). All correlations were significant and greater
than 0.60. Thus, we believe our models essentially embody the nuanced aspects of the
home-country’s human capital. All results are available upon request.

Discussion and conclusions

Our study investigated the role of international diversification (by indigenous firms) vis-à-
vis the relationship between home-country conditions and firm performance. We revisited
this trivariate model on the premise that home-country factors represented the fundamental
building block that motivated firms’ international diversification. In turn, this
diversification moderated the baseline effect(s) of local conditions in which indigenous firms
found themselves. Stated differently, although the empirical effect of these interactions
would not per se change, the theoretical architecture of the argument merited at least some
rethinking. Our conceptual shift thus aligned with recent calls to focus on home-country
conditions and their impact on domestic firms’ performance (Bertrand and Capron, 2015;
Kim et al., 2015). Moreover, the shift addressed calls for a more nuanced, context-specific
anchoring of international diversification’s role on firm performance (Kirca et al., 2012). Such
understanding is essential insofar as it allows us to isolate boundary conditions under which
a managerially controllable action (e.g. diversification) can impact firm performance and the
manner in which it would do so, i.e. how indigenous firms can leverage (or breakaway from)
existing home-country conditions.
Our study responded to the above-mentioned calls by examining a longitudinal sample
of 600 observations (representing 65 telecommunications incumbents in 65 countries) who
diversified from their home-country to other countries. Focusing on a single industry Impact of
permitted us to control for inter-industry variance and investigate the role of international home-country
diversification vis-à-vis linkages between home-country factors and firms’ domestic
performance which we measured in terms of the change in firms’ total factor productivity –
conditions
a broader, more fundamental driver of competitive advantage (Chen et al., 2015; Porter,
1990). We tested for – and ruled out – concerns about reverse causality between domestic
productivity and international diversification.
In general, our findings suggest that international diversification by firms has a 387
pervasive influence in moderating the primary impact of home-country conditions on the
domestic productivity of indigenous firms. However – contrary to suggestions in previous
work (Capar and Kotabe, 2003; Hitt et al., 1997; Lu et al., 2014; Tallman and Li, 1996) – the
precise nature of this moderating influence is not uniform. International diversification
neither universally improves firm performance nor universally deteriorates it. On the
contrary, as our findings demonstrate, its moderating effect is mixed – and related to the
specific home-country condition with which it interacts. Even though firms may exploit
internationally what they have developed domestically, their competitive capabilities
essentially bear the institutional signatures of their respective home countries. Clearly,
international geographical diversification plays a more complex role vis-à-vis firm
performance than has been previously assumed: despite its many merits, it is likely not the
“silver bullet” that unconditionally increases firm performance.
Notwithstanding support for many of our hypotheses, we were slightly surprised that
our findings were contrary to expectations for H1c (i.e. cost of capital). In this case,
international diversification lacked a (statistically) significant relationship with home-
country “cost of capital” production factor. This is likely because, at least in recent years,
firms do not have to diversify into international geographies to gain access to (lower cost)
“foreign” capital; these firms can, relatively costlessly, pursue “capital” arbitrage without
leaving their home-country to the extent that global financial markets are generally liquid.
We were also somewhat surprised by our findings for H3 (i.e. diversification’s interaction
with home-country industry competition). We say “somewhat” because considerable
amount of “liability of foreignness” literature supports the idea that home-grown
capabilities do not transfer costlessly (when they transfer at all) to distinct institutional
contexts. In general, this argument should also apply to our (telecommunications) firms.
Although this argument held true for competition in the mobile-telephony segment, it did
not hold true for the fixed-voice segment. In fact, international diversification did not play
any role vis-à-vis competition in the latter segment. It is likely that this segment has a unique
economic configuration – exemplified by, for example, a very localized competitive
structure, mostly immobile assets, heavy capital requirements and increasing liberalization
worldwide – that renders it relatively immune from the vagaries of operating in distinct
institutional context elsewhere. Our unexpected findings thus could be seen as making a
small contribution by re-focusing the generalized thinking about the role of international
diversification.
Our study contributes to the literature in other ways. From a theoretical standpoint, our
work bridges the micro- and macro-level arguments that interweave strands from the
competitive strategy and national competitive advantage literatures. By unpacking
diversification’s role vis-à-vis the effect of upstream (home-country) conditions on firm
performance, we attempt to shed light on the mechanisms that help (or hinder) indigenous
firms’ performance. Empirically, our study helps to reconcile seemingly opposite views
about whether and, if so, how much home-country conditions shape indigenous firms’
expansion after they have diversified internationally. In particular, our work offers a
MBR starting point to relate Zhou and Guillén’s (2015) position that the importance of home-
27,4 country diminishes as indigenous firms expand internationally with Bertrand and Capron’s
(2015) finding that firms that expand geographically (via cross-border acquisitions) exhibit
higher domestic productivity ex post than non-acquiring firms. Our study advances this
debate via a more rigorous and fine-grained analysis of how domestic firms can use
international geographical diversification to alter, when possible, the preordained role of
388 home-country conditions vis-à-vis firms’ performance. Indeed, our study underscores the
view that (above a certain level of supportive home-country conditions) indigenous firms
need not be constrained by their “inherited” home-country legacies (Merchant, 2005). Stated
differently, policymakers have a strong incentive to facilitate mechanisms that promote
indigenous firms’ geographic expansion and inward transfer of investment, knowledge and
technologies that accrue from these firms’ foreign operations.
As with any single-industry study, our focus on the telecommunications industry may
limit the generalizability of our findings. Yet, given the similarity of this industry to other
“network” industries (Henisz, 2003), this limitation does not seem to be overly constraining.
For example, industries such as banking, airlines and power utilities share similar
structures, technologies and entry conditions with telecommunications. Moreover, these
industries too have been opening up in recent years and appear to behave similarly in their
international expansion decisions (García-Canal and Guillén, 2008). Needless to say,
researchers must use caution in applying our findings to industries with dissimilar traits.
An obvious extension therefore would be to replicate our work in other contextually-
idiosyncratic industry settings (Sarkar et al., 1999). Researchers might also find it useful to
consider other salient home-country factors. Given our industry focus, we limited our
scrutiny to a set of 12 relevant home-country conditions (despite being constrained by the
availability of reliable data). While some of these conditions would, undoubtedly, be relevant
in other industry settings as well, it is likely that other industry contexts (and data
availability) would decree a focus on home-country conditions that we did not include in our
study. From an empirical standpoint one could explore the idea that international
diversification mediates the relationship between home country and performance, but this
would predicate on the researchers’ subscribed paradigm view about the primacy of home-
country conditions to firm performance. Clearly, other complementary studies on the topic
would shed useful light on, what we believe is, an important area of scholarly inquiry.

Notes
1. We distinguish between two broad effects of international diversification: the “portfolio effect”
whereby the firm’s overall performance is influenced by international diversification through
simple averaging, and the “competitive advantage effect” whereby the firm’s domestic
competitiveness is impacted by international diversification. Our study focuses on the latter.
2. An anonymous reviewer correctly remarked that “productivity” is just one of several indicators
of “performance”, and recommended inclusion of other indicators (e.g. domestic sales). We
completely agree with the reviewer’s insight but were unable to engage other indicators because
of our study’s focus on the telecoms industry. This industry – historically – has a large
government imprint that jeopardizes the intrinsic validity of alternative measures. We discuss
this issue at some length in the Methodology section. Moreover, we provide additional
justification for the use of our “productivity” measure.
3. All economic variables were converted to PPP international dollars.
4. A multi-output production function is very likely to reflect the actual production function of
telecom firms because, traditionally, they have been multi-output producers (Mobile telephony;
 Fixed-voice telephony). By not restricting itself to a specific production function for firms, DEA Impact of
permits estimation of the ‘change in TFP’ index for firms that offer either or both products.
Moreover, including both mobile and fixed-voice telephony explicitly recognizes demand-side
home-country
effects on production due to the complementarity/substitution between the two technologies (e.g. conditions
Gruber and Verboven, 2001; Hamilton, 2003).
5. An anonymous reviewer noted that ‘Competition’ (here operationalized as a firm’s market
share) should be viewed as a ‘firm-level’ – not ‘home country-level’ variable. Although we do
not disagree with the reviewer, we would argue that in the (telecoms industry) context of our 389
study ‘Competition’ ought to be viewed as a home country-level variable. This is because
viewing it as a firm-level variable implicitly assumes that telecoms firms accrue(d) their
market share(s) under free-market/competitive conditions – a strong assumption given our
study’s focus on the telecoms industry. Thus, our study’s treatment of industry competition
(as a home country-level variable) must be interpreted within the context of our sample (
telecoms industry) – and with abundant caution. We thank the reviewer for requiring this
clarification.
6. TSLS is less efficient (than the OLS technique) when the suspected endogenous variable is, in
fact, exogenous. Thus, following Wooldridge’s (2002) recommendation, we tested for the presence
of endogeneity in our main estimates to determine whether TSLS estimation was really
necessary; the details of this test’s protocols are available upon request. Our findings indicated
that the coefficient of the ‘residuals’ variable was not statistically significant – as we had
expected (given the lagged variables we had created to estimate our models). This suggested that
endogeneity was not an issue in our model and, importantly, reinforced our confidence in the
results we reported in Table III.

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Appendix Impact of
home-country
conditions
Home-country Firm Obs.

Argentina Telefonica 18
Armenia ArmTel 4 395
Australia Telstra 14
Austria Telkom Austria 12
Bahrain Batelco 9
Belarus Beltelcom 7
Belgium Belgacom 8
Bolivia Entel 6
Botswana BTC 9
Brazil Oi 9
Bulgaria Vivacom 8
Canada Bell Aliant 11
Chile Entel 12
Croatia Hrvatski Telekom 8
Cyprus CYTA 10
Czech Republic Telefonica O2 Czech Rep. 14
Denmark TDC 10
Egypt Telecom Egypt 12
El Salvador Telecom El Salvador 1
Estonia Eesti Telecom 14
Finland Telia Sonera 2
FYR Macedonia Makedonski Telekom 12
Germany Deutsche Telekom 17
Greece OTE 11
Guyana Atlantic Tele Network 13
Hungary Magyar Telekom 13
Iceland Siminn 8
Indonesia Telkom 11
Israel Bezeq 7
Italy Telecom Italia 11
Jamaica LIME 14
Japan NTT Docomo 13
Jordan Jordan Telecom 8
Kazakhstan Kazakhtelecom 5
Korea KT 10
Latvia Lattelecom 15
Lithuania TEO LT, AB 15
Malaysia TM 2
Malta Go 9
Mauritius Mauritious Telecom 6
Mexico Telemex 3
Mozambique Mozambique Telecom 9
Namibia Telecom Namibia 6
Nepal Nepal Telecom 1 Table AI.
The Netherlands KPN 8 List of home
New Zealand Telecom New Zealand 17 countries and their
Oman OmanTel 4
national
Pakistan PTCL 7
telecommunication
(continued) firms
MBR
27,4 Home-country Firm Obs.

Paraguay Copaco 5
Peru Telefonica Peru 9
Philippines PLDT 10
Poland Polish Telecom 6
396 Portugal Portugal Telecom 6
Romania Romtelecom 11
Saudi Arabia STC 5
Senegal Sonatel 6

Note: The actual number of data points per home-country is equal to the number of observations reported
above plus 1. This is because the estimation of one observation for our dependent variable (i.e., Change in
Table AI. total factor productivity) requires two yearly data points

Corresponding author
Pavlos Symeou can be contacted at: pavlos.symeou@cut.ac.cy

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