Académique Documents
Professionnel Documents
Culture Documents
. In this study,
we focused on the return on sales (ROS), the
rst component of the ROA in the above for-
mula. We used the ROS, rather than the ROA,
because asset turnover, the other component of
ROA, may vary signicantly across host coun-
tries due to differences in the market value of the
asset (capital) among countries and may not cor-
rectly reect the economic performance achieved
through the economic activities of the foreign
afliates.
Analysis
Following previous studies (e.g., Rumelt, 1991;
McGahan and Porter, 1997; Chang and Hong,
2002), we employed a variance component anal-
ysis to examine the sources of foreign afliate
performance. To examine the variance components
of foreign afliate performance, we estimated the
Copyright 2004 John Wiley & Sons, Ltd. Strat. Mgmt. J., 25: 10271043 (2004)
Does Country Matter? 1035
following random effect model:
t ijkl
= +
i
+
j
+
k
+
l
+( )
jk
+
t
+e
itjkl
In the above formula,
t ijkl
denotes the return
on sales of the ith foreign afliate, in the jth
industry, in the kth country, which is afliated
with the lth MNC (parent rm).
t ijkl
is described
as a linear combination of the grand mean ,
the afliate effects
i
, the industry effects
j
, the
country effects
k
, the corporate (MNC) effects
l
, the interaction between industry and country
effects
jk
, the year effects
t
, and the error term
e
itjkl
. All independent variables and the error term
are treated as random effect variables. The variance
component of the foreign afliate performance is
decomposed as follows:
=
2
+
2
+
2
+
2
+
2
+
2
+
2
e
We employed the MIXED Procedure in the SAS
Program to analyze the above model, and the
model was estimated with the restricted maximum
likelihood method.
RESULTS
Table 2 provides the variance component estimates
of the independent effects and the percentages of
the total variance in foreign afliate performance
explained by the independent effects. Model 1
examined the country effects, the industry effects,
the corporate effects, the afliates effects, and the
year effects on foreign afliates performance. The
results indicate that the afliate effects (31.4%)
were the most important determinant of the foreign
afliates performance, followed by the corporate
effects (10.8%), the industry effects (6.9%), the
country effects (5.5%), and the year effects (0.1%).
These results indicate that corporate effects had
a substantial impact on foreign afliates perfor-
mance, which accounted for over 10 percent of
the total variance. The results also suggest that the
country effects are almost as large as the industry
effects. Similar to previous ndings that business
unit effects had the greatest impact on business
unit performance, our study shows that the afliate
effects had the greatest impact on foreign afliates
performance, accounting for over 30 percent of the
total variance. The year effects had little impact
on performance.
4
All the effect variables, except
the year effects, were statistically signicant at the
p < 0.0001 level.
Model 2 includes the countryindustry interac-
tion effects variable. The results suggest that the
interaction effects explained 10.5 percent of the
total variance. Model 3 includes both the inde-
pendent and the interaction variables. The estimate
for the interaction effects (7.5%) was larger than
that for the country effects (4.3%) and the industry
effects (5.0%). This nding suggests that industry
and country effects jointly, rather than indepen-
dently, inuence foreign afliates performance.
Panel A in Table 3 provides a description of the
data and Panel B presents the results of the vari-
ance component analyses. The results show several
noticeable patterns. First, the country effects were
greater in the LDCs than in more advanced coun-
tries, such as NIEs and DCs. The results indicate
that in the SLDCs and the LLDCs the country
effects accounted for 7.7 percent and 6.2 percent of
the variance respectively, whereas they accounted
for only 4.4 percent in the NIEs and 3.6 percent
in the DCs. Second, the industry effects were also
more important in the SLDCs and the LLDCs than
in the NIEs and the DCs. The results show that the
industry effects accounted for 8.8 percent in the
SLDCs and 7.6 percent in the LLDCs, whereas
they accounted for 6.7 percent in the NIEs and
5.5 percent in the DCs. These results suggest that
the effects derived from external environmental
conditions (i.e., country and industry effects) are
more salient in less advanced economies than in
advanced economies. Third, the corporate effects
are more than twice as important in the NIEs
(11.3%) and the DCs (13.4%) than in the SLDCs
(4.8%) and the LLDCs (8.3%), suggesting that cor-
porate effects matter more in advanced economies
than in less advanced economies. Finally, afliate
4
To draw realistic inferences from the analyses, we also took the
advice of Brush and Bromiley (1997) and calculated a square
root value for each variance component estimate. The relative
impact of afliate effects became much smaller, whereas the
impact of country effects, industry effects, and year effects
became much larger, compared to the impact of the original
estimates. For example, the results show that the impact of
afliate effects presented in Model 1 in Table 2 dropped from
31.4 percent to 26.8 percent after the square root of the estimates
was taken, and those impacts of country effects, industry effects,
and corporate effects increased from 5.5 percent, 6.9 percent,
and 10.8 percent to 11.2 percent, 12.6 percent, and 15.7 percent,
respectively. The order of the relative impact of each level of
effect was consistent with the results reported in Table 2.
Copyright 2004 John Wiley & Sons, Ltd. Strat. Mgmt. J., 25: 10271043 (2004)
1036 S. Makino, T. Isobe and C. M. Chan
T
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Copyright 2004 John Wiley & Sons, Ltd. Strat. Mgmt. J., 25: 10271043 (2004)
Does Country Matter? 1037
Table 3. Variance components by regions
(A) Descriptions of the data
Small LDCs Large LDCs NIEs DCs
Number of rms 82 228 489 504
Number of industries 55 106 137 146
Number of host countries 43 5 9 22
Number of subunits (foreign afliates) 273 565 1855 2490
Total number of observations 1496 3095 10,297 13,921
Year included 19962001 19962001 19962001 19962001
(B) Variance components
Small LDCs Large LDCs NIEs DCs
Estimate % Estimate % Estimate % Estimate %
Year 0.09 0.2 0.07 0.1 0.07 0.1 0.05 0.1
Foreign afliate 13.26 23.1 13.05 24.1 13.81 25.2 15.41 28.2
Corporate 2.75 4.8 4.51 8.3 6.22 11.3 7.34 13.4
Country 4.43 7.7 3.38 6.2 2.39 4.4 1.97 3.6
Industry 5.07 8.8 4.11 7.6 3.67 6.7 2.99 5.5
Error 31.78 55.4 29.14 53.7 28.62 52.3 26.88 49.2
Total 57.38 100.0 54.26 100.0 54.78 100.0 54.64 100.0
N 1496 3095 10,297 13,921
effects were slightly greater in the NIEs (25.2%)
and the DCs (28.2%) than in the SLDCs (23.1%)
and the LLDCs (24.1%). These results suggest
that the effects derived from internal conditions,
especially the corporate effect, are more salient
in advanced economies than in less advanced
economies.
DISCUSSION
This study examines the sources of the variation in
foreign afliate performance, using a large longi-
tudinal sample, with a particular interest in investi-
gating the relative importance of country effects on
foreign afliates performance. The results of the
analyses have several implications. First, our nd-
ings suggest that country does matter for foreign
afliates performance. The evidence supports the
core argument in the conventional international
business literature and the institutional theory:
those national contextual factors do inuence rm
behavior and economic performance. Our ndings
also show that country effects have as great an
impact on foreign afliates performance as do
industry effects. It implies that the choice of host
country is at least as important as the choice of
industry in determining foreign afliates perfor-
mance. While much previous research has used IO
and RBV as conceptual foundations to explain the
determinants of business unit performance, it had
failed to identify country-specic conditions that
inuence rm behavior and performance, treating
the country effect as a constant when, in fact,
it has a signicant impact on business unit per-
formance. Future research needs to incorporate
country effects as an additional determinant of
rm behavior and performance into the theory to
advance our understanding of the antecedent of
rm performance.
Second, our results show some noticeable pat-
terns in the variations in each level of effects on
foreign afliates performance. Interestingly, our
results show that the external effects (country
and industry effects) are more important in less
advanced countries (the SLDCs and LLDCs) than
in advanced countries (the NIEs and DCs). In
contrast, the internal effects (corporate and afl-
iate effects), especially corporate effects, are far
more important in advanced countries (the NIEs
and DCs) than in less advanced countries (the
SLDCs and LLDCs). These ndings suggest that,
with respect to the variation in foreign afliates
performance, internal inuences matter more in
advanced economies and external inuences matter
Copyright 2004 John Wiley & Sons, Ltd. Strat. Mgmt. J., 25: 10271043 (2004)
1038 S. Makino, T. Isobe and C. M. Chan
more in less advanced economies. One possible
explanation for this nding is that countries with
advanced economies are more integrated in terms
of market transactions, infrastructure, institutional
rules and enforcement mechanisms, and hence,
internal effects (corporate and afliate effects)
tend to play a relatively more salient role than
external effects (country and industry effects) in
explaining foreign afliates performance. In con-
trast, in less advanced economies, where mar-
ket transactions, infrastructure, institutional rules
and enforced mechanisms are underdeveloped, the
external conditions vary signicantly among coun-
tries, and hence, external effects tend to play a
relatively more salient role than internal effects
in explaining foreign afliates performance. One
interesting extension of the study is to exam-
ine how the relative importance of external and
internal inuences changes over time, as national
economies become more integrated and as rms
activities become more globalized across coun-
tries. To investigate this issue, a further study
needs to measure interdependence as well as dis-
tance across countries and the rms dependence
on foreign operations and examine their impact on
foreign afliates performance.
Third, our ndings indicate that the interaction
between the industry and country effects had a far
greater impact on foreign afliates performance
than the independent impact of these effects. This
evidence suggests that industry and country effects,
jointly rather than independently, inuence for-
eign afliates performance. One interpretation of
this evidence is that the relative importance of the
industry (country) effects may vary signicantly
across host countries (industries). Previous studies
(e.g., Schmalensee, 1985; Rumelt, 1991; McGahan
and Porter, 1997) have analyzed industry effects
on the business unit performance in a single coun-
try context (i.e., the United States). However,
these studies provide limited insights regarding the
extent to which the observed industry effect is spe-
cic to, or independent of, a particular national
context. Kogut, Walker, and Anand (1997), for
example, highlight the country specicity of an
industry structure and suggest that patterns of inter-
industry diversication would vary across coun-
tries because country-specic institutions inuence
the structural opportunities and resources needed
to diversify into new businesses. To understand
correctly industry effects on the business unit per-
formance, therefore, a future study should examine
the industry effects in cross-national contexts and
identify both location-specic and non-location-
specic effects of an industry across national envi-
ronments.
Finally, our ndings indicate that corporate
effects are twice as great as both industry and
country effects and are far greater than those
corporate effects reported in previous studies of
multiple-business rms (Brush and Bromiley,
1997; Bowman and Helfat, 2001). One possible
explanation for the observation of this relatively
large corporate effect is that MNCs may need
to develop, and may signicantly differ in their
possession of, several key MNC-specic capabil-
ities that are not assumed in domestic multiple-
business rms. For example, Kogut (1985) argues
that MNCs need to develop strategies to manage
the interplay between competitive and compara-
tive advantage along a value-added chain. Ghe-
mawat (2003) argues that MNCs have the capa-
bility to aggregate their FSA through horizontal
foreign direct investment and the capability to
arbitrate their LSA through vertical foreign direct
investment. Similarly, Henisz (2003) suggests that
MNCs may vary in their capabilities to manage
the institutional idiosyncrasies in host countries.
As MNCs need to possess these additional rm-
specic capabilities, the corporate effect on perfor-
mance is more salient in the context of an MNC
than in the case of domestic rm. An important
extension of this study is therefore to investigate
which MNCs are more (or less) likely to bene-
t from an international expansion of operations,
and why.
Our study has several limitations. First, we
do not examine why there are variations in for-
eign afliate performance across different levels
of observation. We merely show how much each
level of effect can explain the variation in for-
eign afliates performance. Although there have
recently been case studies of the effects of national
attributes on economic performance in emerging
economies (e.g., Kapur and Ramamurti, 2001),
more research is needed to extend this line of
study. To develop a more ne-grained research to
cross-national comparisons of rm performance,
future studies may adopt a multi-site, multi-source
research methodology (Harrigan, 1983) to spec-
ify key country-specic factors, such as country
capabilities, institutional rules, and enforcement
mechanisms, and examine their impact on foreign
afliates performance.
Copyright 2004 John Wiley & Sons, Ltd. Strat. Mgmt. J., 25: 10271043 (2004)
Does Country Matter? 1039
Second, as we have focused exclusively on
MNCs originating in a single home country, name-
ly Japan, our ndings may not be generalizable to
other home country contexts. Recent studies have
suggested that home country conditions signi-
cantly inuence rms international market diver-
sication strategies (e.g., Anand and Kogut, 1997;
Wan and Hoskisson, 2003). A simultaneous exam-
ination of both home country and host country
effects on foreign afliates performance might be
an interesting and important addition to the exist-
ing line of research on performance antecedents.
Third, our study did not control for the entry
modes of foreign afliates. Some descriptive stud-
ies in the international business literature indicate
that subsidiary performance and survival tend to
vary among foreign afliates with different modes
of entry. For example, Woodcock, Beamish, and
Makino (1994) found that foreign afliates estab-
lished through the acquisition of local rms tended
to attain a less successful nancial performance
than those established through greeneld entry.
Similarly, Makino and Beamish (1998) found that
joint ventures took on different forms of owner-
ship structure according to their partners nation-
ality and afliatedness, and each form varied in
nancial performance and likelihood of survival.
Furthermore, Luo (2002) suggested that the rela-
tionship between the choice of entry mode and
performance depends on the primary motivation
of market entry (capability exploitation and capa-
bility building) and the threats of environmental
hazards in host countries. A future study should
control for entry mode in its analyses.
Finally, our analyses may be subject to aggre-
gation problems, which might come from two
sources. The rst source is the denition of indus-
try. In this study, the denition of a foreign
afliates industry was based on the respondents
judgment regarding the primary business of the
foreign afliate. Given that some foreign afl-
iates operations are integrated across multiple-
business activities (e.g., production and distribu-
tion of goods), there might be some cases in which
the boundaries of the industry are more broadly
specied than is the case in reality. The second
source of aggregation problems is our denition
of country. We did not capture regional differences
within a country in our analyses, treating a country
as a single location or region. Regional economists,
however, argue that regional differences might be
more salient within rather than between countries
(e.g., Krugman, 1991; Markusen, 1995). Similarly,
a recent study suggested that business performance
varies signicantly across subcultures within a
country (Lenartowicz and Roth, 2001). A future
study may wish to incorporate regional effects in
its analyses to examine whether regional effects
explain a larger portion of the variation in foreign
afliates performance than do country effects.
ACKNOWLEDGEMENTS
We thank Greg Dess, Anthony Goerzen, and
Mike Young for comments on earlier drafts, and
Paul Beamish and Richard Scott for their encour-
agement. We also thank Associate Editor Will
Mitchell and two anonymous reviewers for their
helpful comments and suggestions. The earlier ver-
sions of this paper have been presented in the
Annual Meeting of the Japan Academy of Interna-
tional Business Studies in 2002 and the Academy
of Management Annual Meeting in 2003. We thank
the participants of these meetings for their valu-
able feedback on our study. The work described in
this paper was partially supported by a grant from
the Research Grants Council of the Hong Kong
Special Administrative Region (Project No. HKU
7213/03H).
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1042 S. Makino, T. Isobe and C. M. Chan
APPENDIX 1: COUNTRY CLASSIFICATION
Small LDCs (43) Large LDCs (5) NIEs (9) DCs (22)
Argentina Madagascar Bangladesh Brunei Australia
Bahrain Myanmar Brazil Hong Kong Austria
Bermuda Nigeria China (P.R.C.) Indonesia Belgium
Cambodia Mariana Islands India Malaysia Canada
Cameroon Panama Pakistan Mexico Denmark
Chile Paraguay Philippines Finland
Colombia Peru Singapore France
Costa Rica Poland Thailand Germany
C ote dIvoire Puerto Rico Taiwan (R.O.C.) Ireland
Ecuador Romania Italy
Egypt Russia Korea
El Salvador Rwanda Luxembourg
Fiji Saudi Arabia Netherlands
Ghana Sri Lanka New Zealand
Greece Swaziland Norway
Guatemala Trinidad and Tobago Portugal
Hungary United Arab Emirates Spain
Iran Venezuela Sweden
Israel Vietnam Switzerland
Kenya Western Samoa Turkey
Kuwait Zimbabwe U.K.
Liberia U.S.A.
APPENDIX 2: INDUSTRY CLASSIFICATION
1. Agricultural crops 24. Agricultural chemicals 47. Nonferrous metals
2. Agricultural production livestock 25. Inorganic chemicals 48. Electric wires and cables
3. Agricultural services 26. Chemical preparations 49. Nonmetal products, NEC
4. Forestry 27. Organic chemicals 50. Fabricated structural metal
5. Fisheries 28. Compound purchased resins 51. Kitchen equipment
6. Metal mining 29. Medicinals 52. Bolts, nuts, rivets, & washers
7. Nonmetallic minerals 30. Soap & surface active agents 53. Metal cans
8. Bituminous & lignite mining 31. Cosmetics 54. Plumbing xture ttings & trim
9. Crude petroleum 32. Paints & printing ink 55. Metallurgy products
10. Natural gas 33. Photographic related materials 56. Knives
11. Food & kindred products 34. Chemical preparations, NEC 57. Metal products, NEC
products 35. Petroleum products 58. Engines
12. Beverages 36. Coal products 59. Turbines
13. Prepared feeds & organic 37. Glass 60. General industry machinery, NEC
fertilizers 38. Cement 61. Construction & mining machinery
14. Thread & spinning mills 39. Ceramic 62. Chemical machinery
15. Fabric mills 40. Stone, clay & glass products, 63. Industry robots
16. Knitting mills NEC 64. Machine tools & metal forming
17. Dyeing mills 41. Steel works 65. Farm machinery & equipment
18. Textile goods, NEC 42. Blast furnaces & steel mills 66. Textile machinery
19. Apparel products, NEC 43. Steel pipe & tubes 67. Food products machinery
20. Fabric mills, manmade 44. Cold-rolled steel sheet, strip, 68. Special industry machinery, NEC
21. Sawmills & wood products and bars 69. Industrial patterns
22. Pulp & paper mills 45. Iron foundries 70. Ball & roll bearings
23. Paper & applied products 46. Steel products, NEC 71. General machinery & equipment,
NEC
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Does Country Matter? 1043
72. Duplicators 99. Electric lighting 131. Trucking
73. Calculators 100. Storage batteries 132. Water transportation
74. Word processors 101. Electric lamp bulbs and tubes 133. Air transportation
75. Ofce machines & equipment, 102. (Non)current-carrying wiring 134. Warehousing & storage
NEC devices 135. Transportation services
76. Commercial machinery 103. Electrical equipment & supplies, 136. Communications
77. Audio equipment NEC 137. Broadcasting stations
78. T.V. & radio communications 104. Motor vehicles 138. R & D-textile
equipment 105. Truck & bus bodies 139. R & D-chemical
79. Video equipment 106. Motorcycles 140. R & D-coal & oil
80. Household appliances, NEC 107. Car bodies 141. R & D-steel
81. Tapes & exible disks 108. Internal combustion 142. R & D-nonmetal
82. Electronic components & engines and parts 143. R & D-general machinery
accessories 109. Optical machinery 144. R & D-electric machinery
83. Electronic computers 110. Watches & clocks 145. R & D-transportation
84. Computer equipment, NEC 111. Medical instruments machinery
85. Telephone communications 112. Furniture & xtures 146. R & D-precious
equipment 113. Printing & publishing machinery
86. Radio communications equipment 114. Plastics materials & resins 147. R & D-software
87. Communications equipment, NEC 115. Tires & inner tubes 148. R & D-others
88. Electronic applied devices 116. Fabricated rubber products, NEC 149. Advertising
89. Measuring & controlling devices 117. Leather & leather products 150. Data processing, software
90. Semiconductors 118. Building constructors 151. Equipment rental &
91. Printed circuit boards 119. Construction repair leasing
92. Electron tubes 120. Heavy construction, NEC 152. Automotive rental and
93. Electronic & communication 121. Electric power leasing
equipment, NEC 122. Gas supply 153. Automotive repair &
94. Motors 123. Water supply services
95. Generators 124. Refuse systems 154. Equipment repair
96. Switchgear & switchboard 125. Retail 155. Holding & other
apparatus 126. Wholesale investment ofces
97. Electric transmission & 127. Eating & drinking places 156. Miscellaneous business
distribution equipment 128. Banking & insurance services
98. Electrical industrial apparatus, 129. Real estate and housing 157. Entertainment
NEC 130. Railroad transportation 158. Hotels & motels
159. Miscellaneous personal
services