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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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GLOBAL STRATEGY AND GLOBAL BUSINESS ENVIRONMENT: THE DIRECT AND
INDIRECT INFLUENCES OF THE HOME COUNTRY ON A FIRM’S GLOBAL STRATEGY *
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
July 25, 2011
For the published version, please see:
Cuervo-Cazurra, A. 2011. Global strategy and global business environment: The direct and indirect
influences of the home country on a firm’s global strategy. Global Strategy Journal, 1(3-4): 382-386.
Abstract: In this paper I refocus attention to the home country and explain the role it plays on the firm’s
global strategy. I build on an extended view of the resource-based theory to argue that one can separate
the influences of the home country on a firm’s global strategy into two types. First, 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. Second, an indirect influence in which
specific characteristics of the home country induce the firm to create resources to operate there, and these
resources, in turn, affect the firm’s global strategy.
Key words: global strategy, environment, home country, international business, resource-based theory
* 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
Fellowship at Northeastern University are gratefully acknowledged. All errors are mine.
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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
literature 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).
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
resourcesassets 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 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 combining external inputs with existing resource
in the firm (Penrose, 1959). The presence or absence of specific inputs outside the firm induces it to
develop specific 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 marketplace (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, resulting in noticeable differences in their resource sets
from those of the focal firm. Managers, therefore, can use resources developed at home as strategic
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resources abroad, since these resources have a degree of rarity in comparison to resources developed 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 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 advantage 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 sentiments (Shimp and Sharma, 1987). This gives firms from these countries a disadvantage.
Other consumers 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 countries. These relative preferences depend on the
perceptions about the particular country of origin of the firm and are not restricted to consumers.
Governments also react to the country of origin. Governments 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
influences 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
companies reacting to these preferences by highlighting or modifying the origin of products (Bilkey and
Nes, 1982). In contrast, governments’ views of the home 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.
Additionally, 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 characteristic conditions of the environment there. These
resources are then used by the firm in its international 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 firms to select countries based on their 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 political 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 the firm achieve economies of scale on resources it has developed.
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Second, other resources can help the firm achieve an advantage in comparison to other foreign
investors in the same host country. Firms that emerge in countries with poorly developed institutions and
unsophisticated providers of inputs and intermediate products have to compensate for these deficiencies
by developing some resources (Khanna and Palepu, 2010). When these firms enter other countries with
underdeveloped institutions and weak input providers, they can achieve an advantage over firms coming
from countries with better institutions. For example, firms from countries with poorly developed
institutions generate resources to deal with such institutions and become dominant investors over firms
from advanced economies in countries with poor institutions (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 Valhne, 1977), in
some dimensions the distance between home and host has a positive impact on the ability of the foreign
firm to achieve an advantage over domestic companies. For example, companies that face promarket
reforms in their home country generate the ability to deal with them and achieve superior profitability in
other countries that experience promarket 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 developed 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 advantage 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
influence of the home country on the global strategy of the firm. Traditionally, multinational companies
transferred resources and practices developed in the home country to other countries to address their
corporate social responsibilities there. However, the emergence of a global monitoring democracy with
actors (such as nongovernment organizations and labor unions) overlooking the actions of multinational
firms limits the ability of multinationals to follow this strategy. Instead, multinational firms are
increasingly being required to create global strategies 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
compensate 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
nongovernmental 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
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challenge of controlling their host country operations and capturing value. However, firms originating in
home countries with significant ties to the host countrysuch as economic, security, political, or
migratorybenefit from this association in comparison to firms originating in countries with weak ties.
The ties facilitate the sanctioning and monitoring of misbehavior in the host country and enable the firm
to achieve higher commitment and performance in the host country.
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