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Global Strategy Journal

Global Strat. J., 1 : 382–386 (2011) Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10. 1111/j.2042-5805.2011.00035.x

DOI: 10. 1111/j.2042-5805.2011.00035.x GLOBAL STRATEGY AND GLOBAL BUSINESS ENVIRONMENT: THE DIRECT

GLOBAL STRATEGY AND GLOBAL BUSINESS ENVIRONMENT: THE DIRECT AND INDIRECT INFLUENCES OF THE HOME COUNTRY ON A FIRM’S GLOBAL STRATEGY

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HOME COUNTRY ON A FIRM’S GLOBAL STRATEGY 35 382 386 gsj_ ALVARO CUERVO-CAZURRA* Northeastern University, College

ALVARO CUERVO-CAZURRA*

Northeastern University, College of Business Administration, Boston, Massachusetts, U.S.A.

INTRODUCTION

This article studies one aspect of the influence of the global business environment on the firm’s global strategy: the impact of a firm’s home country. Most international business literature studies the influence of specific characteristics of the host country on a firm’s global strategy (see recent reviews of the lit- erature in Rugman, 2009). The literature has paid less attention to how specific characteristics of the home country influence the global strategy of the firm, at most focusing on distances between home and host country (Johanson and Vahlne, 1977; see Cuervo-Cazurra and Genc, 2011, for a recent review). One reason is that much literature focuses on the expansion across countries and takes the country of origin as a given. This neglect of the home country is understandable, since location tends to receive limited attention in international business (Dunning, 1998), but unfortunate because studies that focus on how particular characteristics of the home country affect a firm’s foreign expansion can provide valuable insights (e.g., Cuervo-Cazurra, 2006; Cuervo-Cazurra and Genc, 2008; del Sol and Kogan, 2007; Garcia-Canal and Guillen, 2008; Holburn and Zelner, 2010).

Keywords: global strategy; environment; home country; inter- national business; resource-based theory *Correspondence to: Alvaro Cuervo-Cazurra, Northeastern University, College of Business Administration, 313 Hayden Hall, 360 Huntington Avenue, Boston, MA 02115, U.S.A. E-mail: a.cuervocazurra@neu.edu

Therefore, this article aims to refocus attention to the host country and explain the role it can play in the firm’s global strategy. The article builds on an extended view of the resource-based view (Penrose, 1959) to explain how one can separate the influences of the home country on a firm’s global strategy into two types: (1) a direct influence in which the home country becomes a resource for the company that helps or hinders its global strategy depending on the views of the home country in host countries; and (2) an indirect influence in which the home country induces the firm to create particular resources to operate there and these resources then affect the firm’s global strategy.

HOME COUNTRY AND GLOBAL STRATEGY

Environment and resources

To explain the influence of home country on global strategy, I extend the resource-based view and its application to international business (Cuervo- Cazurra, Maloney, and Manrakhan, 2007; Peng, 2001; Tallman and Fladmoe-Lindquist, 2002). The resource-based view understands firms as bundles of resources—assets that are tied semipermanently to the firm. These resources are used by managers to create value for customers in competition with the offers of other firms (Penrose, 1959). Some resources give the firm a relative advantage in its current operations when they provide value to

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Commentary

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customers, are rare, and cannot be easily imitated or substituted by competitors (Barney, 1991). However, not all resources support a firm’s advantage. Some may merely help the firm operate and, thus, be neutral on the advantage achieved (Montgomery, 1995). Others may become a source of disadvantage to the firm and reduce its value creation potential (Leonard-Barton, 1992). Existing resources can also be used to expand the firm’s operations into new activities or new geographies, thus enabling the firm to achieve economies of scale on resources it has already developed (Montgomery, 1995). The characteristics of the home country in which the firm emerges influence the types of resources the firm develops in two ways. First, new resources can be created by the firm by modifying inputs the company obtains from its environment and by com- bining external inputs with existing resources in the firm (Penrose, 1959). The presence or absence of specific inputs outside the firm induces it to develop distinct resources that either rely on the availability of particular external inputs or compensate for the lack of certain external inputs (Penrose, 1959; Khanna and Palepu, 2010). Second, the particular norms and institutions prevailing in the country induce the company to develop specific resources to be able to interact with other players in the market- place (Oliver, 1997; Peng, Wang, and Jiang, 2008). In these ways, the environment in which the firm first operates affects the resources the firm develops. These influences of the home country on the resources a firm develops become more noticeable outside the home country and at the beginning of a firm’s multinationalization. In a domestic setting, other domestic competitors develop similar sets of resources in response to the similar availability of inputs and interaction needs and norms. As a result, managers tend to pay little attention to these resources because they are not rare. However, in a global setting, competitors in the host country have responded to different inputs and institutions, result- ing in noticeable differences in their resource sets from those of the focal firm. Managers, therefore, can use resources developed at home as strategic resources abroad, since these resources have a degree of rarity in comparison to resources devel- oped by domestic firms. This influence of the home country on global strategy is most noticeable at the beginning of a firm’s multinationalization, when the home country represents the main source of resources to the firm. As the firm expands across countries and develops new resources in multiple

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host countries, it can use these resources to continue its expansion and, as a result, the influence of the home country diminishes.

Direct effect: home country as a resource used in global strategy

The home country becomes a resource that affects the firm’s global strategy directly. Individuals in the host country associate the firm with its perceived home country, which becomes a resource to the firm, an asset that is tied semipermanently to it. How the country of origin affects a firm’s advan- tage abroad depends on the valuation that individuals in the host country give to the foreign home country. Some consumers dislike foreign products over domestic ones for the sole reason that they are made in another country, reflecting their nationalist senti- ments (Shimp and Sharma, 1987). This gives firms from these countries a disadvantage. Other consum- ers prefer products made in other countries over domestic ones, because they perceive the countries to be more developed and the products made there to be better (Bailey and Gutierrez de Pineres, 1997). This provides an advantage to firms from such coun- tries. These relative preferences depend on the per- ceptions about the particular country of origin of the firm and are not restricted to consumers. Govern- ments also react to the country of origin. Govern- ments give preferential treatment to firms from particular home countries because there are friendly historical relationships or trade and investment agreements between the countries (Frankel and Rose, 2002; Rangan and Drummond, 2004) or because they perceive firms from certain countries as bringing desirable resources to the country. However, governments also discriminate against firms from particular countries because they dislike their governments or they perceive these firms as potentially harmful to the country (Stopford and Strange, 1992). Thus, the home country directly influences a firm’s global strategy in multiple ways. The influ- ences vary between consumers and governments because they have different relationships with the firm. Consumers’ views of the home country usually affect the marketing of products in the host country, with consumers buying products according to their preferences for particular home countries and com- panies reacting to these preferences by highlighting or modifying the origin of products (Bilkey and Nes, 1982). In contrast, governments’ views of the home

Global Strat. J., 1 : 382–386 (2011) DOI: 10.1111 /j.2042-5805.2011.00035.x

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country have a broader impact on the operations of the company, with firms choosing countries in which governments do not restrict investments to firms from particular countries and selecting entry modes based on government support or restriction. Addi- tionally, other individuals in the country react to the home country and affect the firm’s operations, such as the hiring of local employees or its exposure to lawsuits (Mezias, 2002).

Indirect effect: home country inducing the firm to develop resources that are used in global strategy

The home country indirectly affects the firm’s global strategy. It does so by inducing the firm to develop particular resources at home to deal with character- istic conditions of the environment there. These resources are then used by the firm in its interna- tional expansion, providing it with the ability to pursue specific global strategies. There are several ways resources developed at home in response to existing inputs and institutions can be used abroad, with various implications for the firm’s strategy. First, some of these resources induce the firm to select countries based on its ability to use the resources there. For example, firms from corrupt countries become adept at dealing with it and are attracted, rather than repelled, by corruption abroad (Cuervo-Cazurra, 2006), while firms that face politi- cal risk at home learn how to manage it and are more likely to invest in countries with similar risk (Holburn and Zelner, 2010). This not only reduces the cost of doing business abroad (Hymer, 1976) and the related liability of foreignness (Zaheer, 1995), but also helps firms achieve economies of scale on resources they have developed. Second, other resources can help the firm achieve an advantage in comparison to other foreign investors in the same host country. A firm that emerges in a country with poorly developed institutions and unso- phisticated providers of inputs and intermediate prod- ucts has to compensate for these deficiencies by developing some resources (Khanna and Palepu, 2010). When this firm enters other countries with underdeveloped institutions and weak input pro- viders, it can achieve an advantage over firms coming from countries with better institutions. For example, firms from countries with poorly developed institu- tions generate resources to deal with such institutions and become dominant investors over firms from advanced economies in countries with poor institu-

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tions (Cuervo-Cazurra and Genc, 2008), while firms that operate in regulated industries at home learn how to manage government relationships and become dominant investors in regulated industries in other countries (Garcia-Canal and Guillen, 2008). Third, still other resources can help the firm achieve an advantage against domestic competitors. Some dimensions of the home country environment induce the firm to develop highly sophisticated resources to operate there (Cuervo-Cazurra and Genc, 2011), for example to abide by high quality regulations or satisfy the needs of highly demanding capital markets. These highly sophisticated resources can then be used in countries with lower requirements, providing the firm with an advantage over domestic competitors that have not been forced to upgrade their resources. Thus, in contrast to the traditional arguments that distance has a negative impact on the firm (Johanson and Vahlne, 1977), in some dimensions the distance between home and host have a positive impact on the ability of the foreign firm to achieve an advantage over domestic companies. For example, companies that face pro- market reforms in their home country generate the ability to deal with them and achieve superior profitability in other countries that experience pro- market reforms later (del Sol and Kogan, 2007).

CONCLUSIONS

The article focuses attention on how the conditions of the home country affect the global strategy of the firm. It extends the resource-based view from its traditional focus on resources developed to achieve an advantage in the industry, toward resources devel- oped in response to the general conditions of the home country. Although the latter are not advantages in the home country (since all firms develop similar resources), they can provide the firm with an advan- tage abroad and affect its global strategy. The home country can directly become a resource that can be used abroad or indirectly induce the firm to develop particular resources to be used abroad later. Their use and relation to advantage or disadvantage induces the firm to follow particular global strategies. The articles that accompany this article provide sophisticated examples of how aspects of the home country affect a firm’s global strategy. First, Devinney (2011) indicates another limit of the influ- ence of the home country on the global strategy of

Global Strat. J., 1 : 382–386 (2011) DOI: 10.1111 /j.2042-5805.2011.00035.x

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the firm. Traditionally, multinational companies transferred resources and practices developed in the home country to other countries to address their cor- porate social responsibilities there. However, the emergence of a global monitoring democracy with actors (such as nongovernment organizations and labor unions) overlooking the actions of multina- tional firms limits the ability of multinationals to follow this strategy. Instead, multinational firms are increasingly being required to create global strate- gies for dealing with their responsibilities across countries, reducing the influence of the home county on how they undertake corporate social responsibility. Second, Boddewyn and Doh (2011) illustrate how a firm not only develops particular resources to com- pensate for missing inputs at home, but also does this in a host country. Similar to the situation in which a firm will develop resources to compensate for the lack of inputs or collective goods in the home country, in a host country in which collective goods are missing the multinational will have to invest in their development. However, instead of developing them internally, as is often the case in the home country, in a host country the multinational firm may choose instead to assist the government or non- governmental organizations in the creation of these collective goods. The use of this assistance mode is the result of high uncertainty in the defense of contractual obligations and low asset specificity. Third, Rangan and Drummond (2011) explain in detail how the home country can become a resource that supports the advantage of the firm in particular host countries. Multinationals face the challenge of controlling their host country operations and captur- ing value. However, firms originating in home coun- tries with significant ties to the host country—such as economic, security, political, or migratory— benefit from this association in comparison to firms originating in countries with weak ties. The ties facilitate the sanctioning and monitoring of misbe- havior in the host country and enable the firm to achieve higher commitment and performance in the host country.

ACKNOWLEDGEMENTS

I thank Steve Tallman for providing useful suggestions for improvement. The financial support of the Center for International Business Education and Research at the University of South Carolina and the Robert Morrison

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Fellowship at Northeastern University are gratefully acknowledged. All errors are mine.

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Global Strat. J., 1 : 382–386 (2011) DOI: 10.1111 /j.2042-5805.2011.00035.x