Jibs 201233 A

Journal of International Business Studies (2013) 44, 89116
& 2013 Academy of International Business All rights reserved 0047-2506

www.jibs.net
Home-region orientation in international

expansion strategies
Elitsa R Banalieva1 and
Charles Dhanaraj2
1
International Business & Strategy Group,

DAmore-McKim School of Business,
Northeastern University, Boston, USA; 2Kelley
School of Business, Indiana University,
Indianapolis, USA
Correspondence:
C Dhanaraj, Kelley School of Business,
BS 4033, Indiana University, 801 West
Michigan Street, Indianapolis, IN
46202-5151, USA.
Tel: 1 317-274-5694;
Fax: 1 317-274-3312;
email: dhanaraj@iupui.edu
Abstract
Despite the emerging consensus that most multinational enterprises (MNEs)
are regional, systematic theory explaining regionalization is conspicuously
absent, and empirical findings on its implications for MNE performance remain
mixed. Drawing on internalization theory, we suggest that technological
advantage and institutional diversity determine firms home-region orientation
(HRO), and we posit a simultaneous relationship between HRO and performance. We apply insights from the firm heterogeneity literature of international
trade to explain the influence of technology on HRO. We predict a negative
and nonlinear impact of technological advantage on HRO driven by increasing
returns logic, and a negative impact of institutional diversity on HRO driven by
search and deliberation costs. We find empirical support for our model using
simultaneous equations methodology on longitudinal data on Triad-based
MNEs. Performance significantly reduces HRO, but HRO does not have a
significant effect on performance.
Journal of International Business Studies (2013), 44, 89116.
doi:10.1057/jibs.2012.33
Keywords: internalization theory; geographic scope; home-region orientation;
technological advantage; regionalization debate; institutional diversity
INTRODUCTION
Internal inducements to growth are not by themselves profitable opportunities
for expansion nor are external inducements by themselves. Penrose (1995: 87)
Received: 31 December 2011

Revised: 30 September 2012
Accepted: 7 October 2012
Online publication date: 10 January 2013
How do multinational enterprises (MNEs) determine their geographic scope?1 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 expansion.2
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; that is, 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.
Home-region orientation
Elitsa R Banalieva and Charles Dhanaraj
90
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 question why, in an age of purported globalization, many of the worlds 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 fields
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 theorize systematically 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 firms 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
Journal of International Business Studies
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 firms geographic scope.
We integrate the increasing returns mechanism
central to the technology literature (Arthur, 1989;
Ciuriak, Lapham, Wolfe, Collins-Williams, & Curtis,
2011; Helpman, 2006; Helpman, Melitz, & 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
nonlinear 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, Khoury, Peng, & Qian, 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
HROperformance relationship, and can explain
91
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 IB 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.
Rugmans (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, Hoskisson, & Kim,
1997). Researchers in other disciplines have made
similar observations. For instance, portfolio research
in finance has observed that US investors tend to
hold more than 90% of their equity wealth in US
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
HRO matters to firm performance.
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 Ohmaes (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 on 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
group 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
92
Regionalization
Japanese data
Collinson & Rugman (2008)
TCE theory of regionalization

Rugman & Verbeke (2005)
EMPIRICAL EVIDENCE
Regionalization perspective
(Global 500)
Real world managers
think regional
Morrison et al. (1991)
Transnational
strategy for a
flat world
Levitt (1983)
Prahalad & Doz (1987)
Bartlett & Ghoshal (1989)
Porter (1990)
Yip (1992)
Cairncross (1998)
Friedman (1999)
Japanese data
longitudinal FDI
Arregle et al. (2009):
Rethinking global strategy
Ghemawat (2007)
Distance matters
Ghemawat (2003)
Regionalization
Italian data
Cerrato (2009)
End of globalization
Rugman (2000)
2000
2001
2003
2004
2005
2006
2007
2008
2009
2010
2011
Region options and sensitivity

Aguilera et al. (2007)
DEFINING REGION
Relevance of the Triad

Macro data using culture clusters
Dunning et al.(2007)
Modify regionalization measure

to exclude domestic sales
REGIONALIZATION MEASURES
Normalized measure of
regionalization
Asmussen (2009)
Challenging regionalizations
measure and generalizability
Osegowitsch & Sammartino (2008)
Figure 1
Key milestones in the evolution of the regionalization perspective.
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).
Measures of Regionalization
In their early studies, Rugman and associates advocated the use of ratio of home-region sales divided by
total sales, 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, the ratio of rest of home-region
sales to foreign sales (Banalieva & Eddleston, 2011;
Delios & Beamish, 2005; Li, 2005; Rugman &
Verbeke, 2008), and second, the ration of rest of
home-region sales to total sales (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. The first measure r1,
uses the ratio of rest of home-region sales to foreign
sales (Delios & Beamish, 2005; Rugman & Verbeke,
2008). The second measure r2, is the ratio of rest of
home-region sales to total sales minus the ratio of
global sales to total sales (Asmussen, 2009; Elango,
2004; Rugman & Verbeke, 2008)4.
Regionalization and Performance

Although Rugman (2000, 2005) and Rugman and
Verbekes (2004) original work did not assume the
93
implications of regionalization on performance,

several follow-up 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 HROperformance 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 y so prevalent
overall when its performance is the lowest in
the sample? (Delios & Beamish, 2005: 30). None
of these studies has explored the simultaneous
effect of performance on HRO. A firms 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, nonlinear
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.
Non-location-bound
FSA
Technological
Advantage
H1: (negative
nonlinear)
H3: ()
Home Region
Orientation
H2: ()
Institutional
environment
Regional Institutional
Diversity
Performance
H4a: (+)
H4b: ()
Control and 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 orientationeq.
Figure 2
Conceptual model and hypotheses.
94
Technological Advantage
Technological advantage refers to the proprietary
knowledge developed by an MNE through R&D or
otherwise, and embodied in the firms 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, that is, 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 Heckscher
Ohlin models assumed that 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 Krugmans
(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 ahead5
(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-than-proportionate 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 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 others 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
95
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 MNEs 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 Levitts 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 firms resources also
increases more than proportionately (Griliches,
1986; Hansen & Wernerfelt, 1989; Henderson &
Cockburn, 2000). Penrose (1995) emphasized that
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 Levitts 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 firms HRO decreases
more than proportionately. A combination of these
increasing returns in technologys fungibility, market
power, and managerial productivity leads to:
Hypothesis 1: Ceteris paribus, for an internationalizing MNE, as technological advantage
increases, HRO 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 sociocultural 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 sociocultural 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).
96
Distance measures are helpful for dyadic (i.e.,

homehost country) analysis. However, given our
focus is on a regional level of analysis, that is, 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 y 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 in
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 such as 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, owing to their market-based institutions (Zhou & Poppo, 2010), they may be futile in
countries within the home region with less marketbased 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: Ceteris paribus, for an internationalizing MNE, the greater the institutional diversity of its home region, the lower the firms HRO.
The HROPerformance 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 MNEs 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
97
strategies that can generate greater returns (Tseng,

Tansuhaj, Hallagan, & McCullough, 2007). Global
strategy has been associated with higher risk
compared with 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 firms financial wealth
with a greater degree of innovation (LeonardBarton, 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) note, 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 HRO.
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, Kudina, & Yip, 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. These arguments
suggest that a high HRO enables more effective
interactions (Rosenthal & Strange, 2003), which
can enhance firm performance.
On the other hand, a high HRO can reduce firm
performance as it prevents firms from diversifying
risk across geographic markets (Agmon & Lessard,
1977; Dhanaraj & Beamish, 2004; Rugman, 1976;
1980). Global diversification is associated with risk
reduction as distant global markets are less correlated with one another than proximate ones
(Agmon & Lessard, 1977; Speidell & Sappenfield,
1992). 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 visa`-vis rivals. Increasing global diversification is also
98
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 lead to shortages (Almeida & Kogut,
1997; Pouder & St John, 1996; Shaver & Flyer,
2000). These arguments would suggest a negative
relationship between HRO and firm performance.
Thus we have two competing hypotheses stated as:
Hypothesis 4a: Ceteris paribus, for an internationalizing MNE, the greater its HRO, the greater
its performance.
Hypothesis 4b: Ceteris paribus, for an internationalizing MNE, the greater its HRO, the lower
its performance.
RESEARCH DESIGN
Research Context
We tested our conceptual framework using data
from the Triad (i.e., the US, 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 macroeconomic features: for example, low economic growth, economic and financial infrastructures, government
regulations, relatively homogeneous 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 Triads 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 Triadbased 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 come from firms annual
reports, and are provided by WorldVest 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 increasingly being used for international research (e.g., Chakrabarti, Singh, & Mahmood, 2007;
Chakrabarti, Vidal, & Mitchell, 2011; Rugman, 2007;
Rugman et al., 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 crosschecked the financial data reported in OSIRIS and in
the firms annual reports, and found that the two
sources are consistent. Adjusting for these data
limitations, our final sample consisted of firms based
in 12 Triad countries (i.e., the US, Japan, Denmark,
Finland, France, Germany, Ireland, the Netherlands,
Norway, Sweden, Switzerland, and the UK). Over the
19972006 period, these countries collectively represented 62.11% in average GDP share as a percentage
of the worlds GDP,6 a reasonable coverage.
We used the Bloomberg Terminal, a computer
system provided by Bloomberg L.P., that provides
99
real time and historical financial data on public

companies worldwide, to extract the stock market
capitalization for the firms in our sample. The
macroeconomic data in our analysis came from the
World Bank and the United Nations University
Comparative Regional Integration Studies (UNUCRIS, 2008). 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
world7 (e.g., DiRienzo, Das, Cort, & Burbridge,
2007; Gwartney, Lawson, Park, Edward, de Rugy,
& Wagh, 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, Brown, How, & Verhoeven,
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, owing to the panel data structure
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, Lopez-De-Silanes,
Shleifer, & Vishny, 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 3061 firm-year observations
(33.09% from the US, 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
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, Torrisi, Gambardella, Guellec, Hall, & Harhoff, 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 firms patent portfolio if
companypatent matching is performed based
solely on company names (Thoma et al., 2010).
Second, while Thoma et al. (2010) and Hall, Jaffe,
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, owing 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 timevarying measure of firms technological advantage.
100
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
firms 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); that is, 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
natural logarithm of Tobins Q as an alternative performance measure, which we discuss later.
Control variables
We controlled for a range of additional factors
summarized in Table 1.
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:
Performancei;t1 a0 a1 HROi;t1
aj Identifying & Control Variablesj;t e1i;t
1
HROi;t1 b0 b1 Performancei;t1 b2
Technological Advantagei;t
b3 Technological Advantage sq:i;t
b4 Regional Institutional Diversityi;r;t
b5 Identifying & Control Variablesj;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 this simultaneity into account
(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 de-meaning 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 de-meaning 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
time-invariant 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
101
higher mis-specification risk (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
Table 1
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
Control variables
Measure
Operationalization
Rationale
Marketing Advantage
Selling, general, administrative expenses/total sales
Control for location-bound FSAs

(Anand & Delios, 2002)
Multinationality
Foreign sales/total sales
Control for international expansion (Li,

2005; Rugman & Verbeke, 2008)
Industry Diversification
1
X 2
si
Control for industry diversification

(Tallman & Li, 1996)
where si is the share of sales from business segment i

Regional Market Attractiveness
Rest of home-region GDP growth
Control for market attractiveness

(Goerzen & Beamish, 2003)
Firm Age
ln(number of years since incorporation+1)
Control for experience effects
Institutional Distance
Average GlobaltoHome Country Distance

Average ResttoHome Country Distance
2
Control for institutional distance

between home country, rest of home
region, and global segment
where
Average GlobaltoHome Country Distance
Average Global BERI Score
Home Country BERI Score
Average ResttoHome Country Distance
Average Rest of Home Region BERI Score
Home Country BERI Score
Firm Size
ln total sales (thousands of US dollars)
Control for economies of scale
Industry HRO
Average HRO for focal firms competitors in each

industry (sic2) and year, excluding focal firms HRO
Control for industry isomorphism

effects
Firm Effects
Fixed effects within-transformation of the variables
Control for firm fixed effects

(Clougherty, 2006; Wooldridge,
2009)
Year Effects
01 dummy variables for each year, 1997 base year
Control for business cycle effects

(Li, 2005)
1.00
0.20
1.00
0.11
0.37 1.00
0.12
0.23 0.03
0.05
0.13 0.38
0.07
0.11 0.31
0.36 0.06 0.03
0.29 0.02 0.13
0.35
0.04 0.03
1.00
0.14
1.00
0.16
0.04
0.33
0.15
0.08
0.14
0.36
0.23
0.04
0.05
0.01
0.04
0.07 0.08
0.10
0.02
0.24 0.03
1.00
0.27
0.07
0.40
0.10
0.08
0.15
0.01
0.05
0.43
0.37
0.24
Note: Bold indicates significance at 5%. N3061.
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
ROA
0.05 0.09
1.00
0.37 0.31
0.00
1.00
0.05 0.06 0.18 0.23
1.00
Marketing advantage
0.23 0.15 0.11 0.26
0.55
Multinationality
0.43 0.24
0.04 0.06
0.22
0.21 0.02 0.14
0.16 0.15
Industry home-region orientation
0.38 0.12
0.01
0.22 0.17
Institutional distance
17.26 5.15
0.07
0.01
0.11
Firm age
3.58 1.03
0.06
0.12 0.28
Firm size
13.28 2.04
0.17 0.06 0.17
Regional market attractiveness
4.43 1.59
0.04
0.21 0.13
Industry diversification
0.40 0.25 0.03 0.05 0.07
0.03 0.21
Leverage
0.51 0.24 0.16
Domestic market size
28.97 1.10
0.01 0.35
0.07
Currency zone
1.11 0.32
0.00
0.15
0.05
RTA trade
0.71 0.21
0.00 0.05 0.02
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
S.D.
Mean
Variable
Table 2
Descriptive statistics and correlations matrix
10
11
1.00
0.03
0.03
0.06
0.06
0.06
12
13
14
15
1.00
0.20
1.00
0.12 0.08
1.00
0.05
0.09 0.45 1.00
0.05
0.00
0.29 0.12
102
consumer demand locally. Currency Zone is equal to

1 for countries with no common currency (i.e.,
19972006: US, Japan, Denmark, Norway, Sweden,
Switzerland, and the UK; 19971998: Germany,
Finland, France, Ireland, and the 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 extraregional trade intensity index (Iapadre, 2006).
Both HETI and HITI are functions of the regions
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 US 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 (po0.05) correlated only with Performance but not with HRO, and Currency Zone, RTA
Trade, and Domestic Market Size are significantly
(po0.05) 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 p-value of
the Sargan test suggests that the system of equations is properly identified: the Sargan test p-value
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.
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 13 on column 1 and Hypothesis 4 on
column 2.
103
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 (po0.05), and thus provides partial support for
Hypothesis 1. Hypothesis 2 is fully supported,
because column 1 shows that Regional Institutional
Diversity had a negative and significant (po0.001)
effect on firms HRO. Hypothesis 3 is also fully
supported, because column 1 shows that performance significantly (po0.05) 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 against
the sample Technological Advantage (Figure 3) and
the average HRO against the three categories
(low, medium, or high) of Technological Advantage
(Figure 4). For Figure 4, 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
low-technology MNEs (1766 firm-year observations) had Technological Advantage less than 0.02
Table 3
Three-stage least squares regression results
Dependent variable
Technological advantage sq.
Performance
HRO
ROA
0.021
(1.001)
0.007*
(2.485)
0.145***
(6.078)
0.240*
(1.999)
0.010
(0.472)
0.007*
(2.280)
0.001
(0.028)
Marketing advantage
Multinationality
Firm size
Firm age
Industry diversification
Regional market attractiveness
Institutional distance
Industry HRO
Domestic market size
Currency zone
RTA trade
0.021
(0.988)
0.001
(0.061)
0.085**
(2.845)
0.081**
(3.206)
0.043*
(2.082)
0.066w
(1.850)
0.013
(0.435)
0.023
(1.090)
0.141***
(3.944)
0.058**
(2.668)
0.073**
(2.598)
Leverage
Constant
Chi-sq.
0.212***
(3.696)
155.68***
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***
po0.10; *po0.05; **po0.01; ***po0.001.

Note: t-statistics in parentheses. N2436.
and an average HRO of 0.40. The mediumtechnology Triad MNEs (976 firm-year observations) had Technological Advantage between 0.02
and 0.12 and an average HRO of 0.39. The hightechnology Triad MNEs (319 firm-year observations) 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
104
Home Region Orientation
1
0.8
0.6
0.4
0.2
0
0
0.2
0.4
0.6
0.8
Figure 3 Sample home-region orientation vs technological

advantage.
Average Home Region Orientation
0.50
0.40
0.39
0.40
0.30
0.20
0.19
0.10
0.00
Low
Medium
High
Figure 4 Average home region orientation vs technological

advantage.
Note: HRO is rest of home region sales/foreign sales.
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 lowand 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.
Robustness Tests
We performed additional robustness tests to rule
out possible alternative explanations for our
results.8 Because of space considerations, we present some of these additional tests in Table 4, with
full results available from the authors upon request.
First, we retested the models with a market-based
performance measure: Tobins Q (natural log 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 accountingbased measures such as ROA than with marketbased measures such as Tobins 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 marketbased performance significantly.
Second, we replaced the BERI composite measure
with each of its three sub-components (Appendix A)
and present the results in Models 24 in Table 4. 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
consistent. We next used each of the Fraser subcomponents (Appendix B). The results for Hypotheses 1 and 3 were consistent. Hypothesis 2 was fully
supported only with the Government and Legal
Fraser sub-components. 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 (po0.05). 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
salesglobal 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
105
Table 4
Three-stage least squares robustness tests
Independent variable
(a) HRO as the dependent variable
Performance
Technological advantage sq.
Regional institutional Diversity (BERI)
Model 1
1.019
(1.499)
0.073
(1.577)
0.011*
(2.041)
0.105**
(2.684)
Model 2
0.238*
(1.987)
0.020
(0.963)
0.008*
(2.540)
Model 3
0.283*
(2.297)
0.019
(0.923)
0.008**
(2.640)
Model 4
0.235*
(1.965)
0.020
(0.982)
0.007*
(2.418)
0.234w
(1.900)
0.022
(1.076)
0.007*
(2.500)
0.108***
(4.836)
Regional institutional diversity (BERI-ORI)

Regional institutional diversity (BERI-PRI)
0.010
(0.395)
0.158***
(6.301)
Regional institutional diversity (BERI-RFactor)

Regional institutional diversity (Fraser)
(b) Performance as the dependent variable

Dependent variable
Independent variable: Home-region orientation
Model 5
Tobins Q
0.368
(1.064)
ROA
0.233
(1.261)
ROA
0.231
(1.233)
ROA
0.162
(0.635)
0.051w
(1.855)
ROA
0.221
(1.100)
po0.10; *po0.05; **po0.01; ***po0.001.

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. N2436.
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 growing scholarly attention. Our
empirically supported, theoretical proposition that
nonlinear 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 Rugmans
(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 Cerratos (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 and 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 such as 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
106
0.6
Home Region Orientation
0.5
0.4
0.3
0.2
0.1
USA
Japan
Western Europe
05
04
03
02
01
00
99
06
20
20
20
20
20
20
20
98
19
19
97
0
19
dictating countries international trade patterns.

Little has remained understood as to whether and
how increasing returns can affect firm-level phenomena such as geographic scope. Our paper sheds 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 US 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 the institutional diversity of the environments that they work in.
We also analyzed the dynamics of HRO evolution
over 19972006. Our t-test with unequal variance
and Welchs adjustment showed that the average
HRO has grown significantly (po0.05) 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 5. European MNEs were the most regional
in the sample. American firms were the least
regional, with an average HRO decreasing slightly
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).
Additionally, our post-hoc analysis on the dynamics of HRO over time confirmed the importance
of regional integration. For instance, European
Year
Figure 5 Longitudinal trends in the home-region orientation of

the Triad.
MNEs were the most regional, and American firms

were the least regional. 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 (Johanson & 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: 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
HROs 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
107
constrained or driven by other variables, and hence

is not a strategic option by which performance can
be enhanced or diminished. We also took a very
careful approach to account properly for HROs
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, could further enhance the
generalizability of our findings. Unfortunately, our
data were 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 firms technological advantage. However, we have not yet, as a field, generated
a comparable measure of technology across different
geographies, 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 Triadbased 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, to 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 the penetration of 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 on how firms use
diverse entry modes to exploit their FSAs across
diverse geographies. Expanding the regionalization
research to frame 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.
ACKNOWLEDGEMENTS
We are grateful for the invaluable feedback from the
editor, Professor Ulf Andersson, and from three
anonymous reviewers, which has sharpened our
contribution here. We thank our colleagues who have
helped us significantly: Christian Asmussen, Paul
Beamish, Allan Bird, Cyril Bouquet, Anthony Goerzen,
Shyam Kumar, Harry Lane, Dan Li, Marjorie Lyles,
Simon Parker, Ravi Ramamurti, Subramanian Rangan,
Alan Rugman, K. Sivakumar, Alain Verbeke, and the
participants at the research workshops at BEPP
department at Indiana University, Haskayne School of
Business at the University of Calgary, IB&S group at
Northeastern University, and strategy department at
Boston College. The first author acknowledges the
108
support from the Northeastern Universitys Gary

Gregg Research Fellowship and the second author
acknowledges the support from the Indiana Universitys Schmenner Faculty Fellowship for enabling this
research.
NOTES
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 firms geographic scope is a cumulative effect of its locational choices (Hennart, 2011).
Some studies use it synonymously with degree of internationalization; others use entropy measures to include
the dispersion and diversity dimensions (Goerzen &
Beamish, 2003; Hitt et al., 1997; Lu & Beamish, 2004;
Tallman & Li, 1996). Until Rugman and associates work,
most of the work had not differentiated between near
and far geographic activities, as the literatures primary
focus had been on domestic vs foreign markets.
2
Dunning (1998) pointed out that location
remained a neglected issue in IB research, and a
decade later, when Dunnings article received the JIBS
Decade Award, Cantwell (2009) gave a reminder that
the issue still persisted.
1
We are grateful to our anonymous reviewers, who

gently nudged us to stay neutral and consistent with
the established terminology in the regionalization
literature.
4
If T is the total sales of an MNE, D is the domestic
sales, F is the foreign sales, and R is the sales within the
home region, and G is the sales outside the home
region, then our measures r1 and r2 for regionalization
can be represented as: r1(RD)/F and r2(RD)/
TG/T. Note that TD F, F(RD) G, and r1 and r2
are highly correlated.
5
Arthur (1996) also worked on increasing returns
from a technology competition perspective, focusing on standards and lock-in, and assuming increasing
returns conferred by a combination of the impact of
economies of scale, network externalities, and switching costs. Romer (1986: 1002), in his work on long-run
growth models, assumed that knowledge is an input
that has increasing marginal productivity.
6
Based on authors calculations using World Bank
data.
7
For more details, please refer to: http://www
.freetheworld.com/datasets_efw.html.
8
We are grateful for the two anonymous reviewers
for suggesting some of these robustness tests.
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APPENDIX A
Table A1
Description of the BERI Index
Sub-index
Objective
Criteria
Continuous range
Operational
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.
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.
70100: Stable environment, typical

of an advanced industrialized
economy.
5569: There are some complications
in day-to-day operations.
4054: There are major complications
in day-to-day operations.
039: Unacceptable business
conditions.
Political
Focuses on socio-political
conditions in a country.
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; and instability
as perceived by unconstitutional
changes and guerilla wars.
70100: Stable environment; political

changes will not lead to conditions
seriously adverse to business.
5569: Political changes seriously
adverse to business have occurred in
the past, but governments in power
have a low probability of introducing
such changes.
4054: Political developments
seriously adverse to business exist or
could occur.
039: Unacceptable political
conditions severely restrict business
operations. Loss of assets from rioting
and insurgencies is possible.
Remittances and
repatriation of
capital
Focuses on a countrys capacity

and willingness for foreign
companies to convert profits
and capital in the local currency
to foreign exchange and
transfer the funds, and have
access to convertible currency
to import components,
equipment, and raw materials.
Includes a legal framework sub-index,

foreign exchange generation subindex, accumulated international
reserves sub-index, foreign debt
assessment sub-index.
0100 (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).
Source: Business Environment Risk Intelligence (BERI) (2008).
114
APPENDIX B
Table B1
Description of the Fraser index
Sub-index
Objective
Criteria
Continuous range
Area 1:
Government
Captures size of government:

expenditures; taxes, and
enterprises.
General government consumption

spending; transfers and subsidies as
% of GDP; government enterprises
and investment; top marginal tax rate.
010, with higher values

meaning better government
quality.
Area 2: Legal
Captures legal structure and

security of property rights.
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.

meaning better legal quality.
Areas 3 and 4:
Economic
Captures access to sound

money and freedom to trade
internationally.
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.

meaning better economic
quality.
Area 5: Regulatory
Captures the regulation of

credit, labor, and business.
Credit market regulations; labor market

regulations; business regulations.

meaning better regulatory
quality.
Source: Gwartney et al. (2002).
115
APPENDIX C
Table C1
United Nations country groupings
Asia and Oceania
Europe
Americas
Other
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*
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*
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*
Algeria
Angola
Benin
Botswana
Burkina Faso
Burundi
Cameroon
Central Afr. Republic
Chad
Congo, Dem. Republic
Congo, Rep. Of
Cote dIvoire
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
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 with 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 worlds GDP (based on authors calculations using World Bank data on GDP).
116
ABOUT THE AUTHORS

Dr Elitsa (Ellie) R. Banalieva is an Assistant
Professor of International Business and Strategy
and a Gary Gregg Research Fellow at the Northeastern Universitys DAmore-McKim School of
Business. Her research focuses primarily on the
geographic scope and institutional environments
of multinational firms from developed and emerging markets. She received her PhD in business
economics/strategic management from Indiana
University, Bloomington.
Dr Charles Dhanaraj is an Associate Professor of

Management and Schmenner Faculty Fellow at the
Kelley School of Business, Indiana University. He
holds a visiting appointment at the Center for
Leadership, Innovation, and Change at Indian
School of Business (ISB), Hyderabad. Dr Dhanaraj
earned his PhD from Richard Ivey School of
Business, Canada. His research focuses on globalization, innovation, and collaboration.
Accepted by Ulf Andersson, Area Editor, 7 October 2012. This paper has been with the authors for two revisions.

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Journal of International Business Studies (2013) 44, 89116

& 2013 Academy of International Business All rights reserved 0047-2506

Home-region orientation in international

International Business & Strategy Group,

Received: 31 December 2011

Elitsa R Banalieva and Charles Dhanaraj

Propelled by this provocative insight, a number of

Journal of International Business Studies

Elitsa R Banalieva and Charles Dhanaraj

the inconsistent empirical findings on the impact

GEOGRAPHIC SCOPE IN IB RESEARCH

Journal of International Business Studies

Elitsa R Banalieva and Charles Dhanaraj

TCE theory of regionalization

Region options and sensitivity

Relevance of the Triad

Modify regionalization measure

Key milestones in the evolution of the regionalization perspective.

physical immediacy is a precondition for a sense of

Journal of International Business Studies

the thresholds as arbitrary and suggested that the

Regionalization and Performance

Elitsa R Banalieva and Charles Dhanaraj

implications of regionalization on performance,

direction of causality between performance and

Control and identifying variables

Conceptual model and hypotheses.

Journal of International Business Studies

Elitsa R Banalieva and Charles Dhanaraj

Journal of International Business Studies

new trade theory aligns well with the empirical

Elitsa R Banalieva and Charles Dhanaraj

distant global markets and dislodge global rivals

international expansion opportunities and respond

Journal of International Business Studies

Elitsa R Banalieva and Charles Dhanaraj

Distance measures are helpful for dyadic (i.e.,

Journal of International Business Studies

variance across the institutional environments

The HROPerformance Relationship

Elitsa R Banalieva and Charles Dhanaraj

strategies that can generate greater returns (Tseng,

The impact of HRO on performance

Hennart (2011) convincingly argued that firms can

Journal of International Business Studies

Elitsa R Banalieva and Charles Dhanaraj

Journal of International Business Studies

products (Rugman & Verbeke, 2004: 4). Third,

Elitsa R Banalieva and Charles Dhanaraj

real time and historical financial data on public

Journal of International Business Studies

Elitsa R Banalieva and Charles Dhanaraj

Regional institutional diversity

aj Identifying & Control Variablesj;t e1i;t

Journal of International Business Studies

Elitsa R Banalieva and Charles Dhanaraj

higher mis-specification risk (Wooldridge, 2009).

is not in the other equation for identification

Selling, general, administrative expenses/total sales

Control for location-bound FSAs

Foreign sales/total sales

Control for international expansion (Li,

Control for industry diversification

where si is the share of sales from business segment i

po0.10; po0.05; po0.01; po0.001.

po0.10; po0.05; po0.01; po0.001.