Firm-and Country-Specific Advantages - … Country-Specific Advantages: A Multi-Level Analysis of Internationalization 7 that the relationship between the industrial organization model

Firm-and Country-Specific Advantages:A Multi-Level Analysis of Internationalization

남 대 일*1)Dae Il Nam ․ Len J. Trevino**2) ․ John B.3)Cullen***ABSTRACT

This study develops a comprehensive multi-level analysis, including firm-level and

country-level drivers, that attempts to explain firms’propensities to internationalize their

operations. Drawing on industrial organization, transaction cost economics, strategic

management, and institutional theory literatures, we develop multi-level hypotheses

regarding firms’internationalization. We test our hypotheses using data on 26,859 firms

from 27 countries using Hierarchical Generalized Linear Modeling(HGLM). Results indicate

that the presence of foreign competition, dependence on foreign materials and education

of the top management team are positively associated with a firm’s propensity to expand

internationally. However, market power, management ownership, and the top management

team’s foreign company experience were not supported, as hypothesized. We studied two

country-level drivers, cultural and social institutions. For the culture-level indicators, we

confirm that uncertainty avoidance and in-group collectivism are negatively associated

with internationalization, while power distance and performance orientation are positively

associated with this construct. For the social institutions, we found a positive and

significant relationship between educational attainment and internationalization but not

for political stability.

Keywords : Internationalization, Multi-Level Analysis, Hierarchical Generalized Linear Modeling, Firm Specific Advantages, and Country Specific Advantages

기업수준과 국가수준의 경쟁우위 : 다층구조 분석을 통한 세계화 연구

초 록이 논문은 광범위한 다중 수준의(기업 수준과 국가 수준) 분석 결과를 바탕으로 왜 기업이 세계화를

하는지에 대한 물음에 답하고자 하였다. 이를 위해, 산업조직, 거래비용, 전략경영, 제도론 등과 같은

이론적 근거를 바탕으로 가설을 도출하였다. 이러한 가설을 실증적으로 검증하기 위해 위계적일반선

형모델을 활용, 27개국의 26,859개의 회사수준 데이터를 사용하였다. 먼저, 기업 수준의 결과가 나타

내는 바는, 외국기업의 경쟁, 외국 조달의 의존성, 최고경영진의 학력, 등의 변수가 세계화와 정의 관계가

있음을 보여주었다. 반면, 시장에서의 영향력, 경영진의 오너십, 그리고 최고 경영진의 외국 기업의

경험 등은 가설과 달리 지지되지 않았다. 한편, 국가 수준의 변수로 위험 회피성, 그룹 내 집단주의

등은 세계화와 음의 관계를 보여주었으며, 권력 격차, 성과 지형성은 양의 관계를 보여 주었다. 사회

제도의 경우 교육수준의 경우 유의미한 결과를 보여 주었으나, 정치적 안정성은 지지되지 못하였다.

키워드 : 세계화, 다층 구조 분석, 위계적일반선형모델, 기업수준 경쟁우위, 국가수준 경쟁우위

***1)Korea University Business School, 제1저자, 교신저자***2)Loyola University***3)Washington State University

6 POSRI경영경제연구 제12권 제2호 2012

Ⅰ. INTRODUCTION

One of the most fundamental questions distinguishing international from domestic business research is why companies expand operations beyond their home-country borders, and extensive literature from international business has attempted to answer this question(Tallman and Yip, 2001). Until the 1970s, most of the literature that examined this phenomenon was driven by economists who were interested in macro-level trade and foreign direct investment flows between countries(Peng, 2001; Tallman and Yip, 2001). In general, two broad perspectives represent the influence of researchers during this period: the oligopolistic market power(Hymer, 1976; Kindelberger, 1969) and transaction cost economics(TCE)(Coase, 1937; Williamson, 1975) approaches. Whereas the former research stream focuses on the market structure of an industry, the latter evaluates the transaction and emphasizes the cost-benefit analysis associated with internalization.

As the field of strategic management began to take root in the 1970s, international business research turned more to firm-level analysis to explain international capital flows(Peng, 2001). This stream of research attempted to explain “why some firms possess unique resources and competencies– relative to their competitors of other nationalities”(Dunning, 1995: 455). Strategic management literature supported this research by providing different theoretical lenses, such as the resource-based view of the firm (Barney, 1991). As a result, there has been “a virtual explosion” in international strategy research(Ricks et al., 1990: 230). However, in spite of its theoretical importance, few cross-national studies have empirically examined internationalization at the firm level, likely due to the difficulty of obtaining data on firm-level expansion. By explaining firm-specific behavior using industry-and country-level data, however, researchers made assumptions of dependent and independent variable homogeneity that we know to be unwarranted(Rumelt, 1991). In line with this reasoning, it has been observed

Firm-and Country-Specific Advantages: A Multi-Level Analysis of Internationalization 7

that the relationship between the industrial organization model and the resource-based view of the firm(RBV) has been obscured by the use of industry data in international studies(Anand and Kogut, 1997). Further, even if researchers fully understood the concerns related to using industry-or country-level data to explain firm level phenomena(Dunning, 1980), they may have had no choice but to use macro-economic data due to the unavailability of firm-level data.

In addition to the problems associated with the use of macro-economic data to explain micro-economic phenomena, there is a dearth of multi-level research that examines firms’ internationalization. However, because organizations may not be free from external forces, a uni-level analysis cannot capture the true nature of internationalization. Absent are multi-level theoretical and empirical approaches that consider not only the firm but also the country-level(Calvet, 1981). National culture has provided the most common explanation for explaining country-level differences in firm-level internationalization. However, as recognized by Hofstede(2001), national culture represents only a part, albeit an important one, of the country-level context. Extensive evidence shows that cross-national differences are best understood by considering both national culture and social institutions (Hofstede, 2001; Cullen et al, 2004). Indeed, social institutions play an important role in influencing organizational characteristics both within and between nations(Scott, 1995). As such, we include theoretical lenses that explore not only cultural values but also social institutions.

In summary, Werner(2002: 293) asserted that “numerous micro and cross-level international topics appear to be potential research areas not currently addressed in top management journals.” This study attempts to overcome both of these shortcomings by developing a multi-level model of international expansion that accounts for both firm-(level 1) and country-specific variables(level 2) simultaneously. Hierarchical generalized linear modeling(HGLM) is used to test these multi-level arguments(Bryk


and Raudenbush, 1992). Unlike traditional non-multilevel methods, HGLM can provide for the correct specification among these variables. More specifically, we attempt to answer the following questions:

1) Can the oligopoly power model predict a firm’s propensity to expand

internationally? (Firm-level)2) Can the transaction cost economics model predict a firm’s propensity to

expand internationally? (Firm-level)3) Can the strategy and managerial perspective predict a firm’s propensity

to expand internationally? (Firm-level)4) Do cultural values influence a firm’s propensity to expand internationally?

(Country-level)5) Do social institutions influence a firm’s propensity to expand internationally?

(Country-level)

To address these research questions, the remainder of this paper is organized as follows. The study begins with a brief literature review of each of the theoretical approaches underlying the study. Second, we propose hypotheses based on firm-and country-level drivers. Third, based on secondary data of 26,859 firms from 27 countries(The World Bank Group, 2005), we provide comprehensive empirical evidence in support of the model. Finally, we discuss the results and limitations and suggest managerial implications and directions for future research.

Ⅱ. THEORETICAL DEVELOPMENT AND HYPOTHESES

The modern theory of internationalization was developed by Hymer(1976) and Kindelberger(1969) in their oligopoly power models(Tallman, 1992). Their approach focuses on the market structure of competitiveness as the


primary determinant of internationalization. Several variants of the oligopoly power model have subsequently appeared in the literature, including “follow the leader”(Knickerbocker, 1973), “exchange of hostages”(Graham, 1974), and “international life cycle theory”(Vernon, 1971). Oligopolistic models suggest that a firm will select a host country in order to deter competitors’ entry or to block their positions(Kogut, 1988). In line with this reasoning, large firms with market power could be expected to use internationalization to transfer their market power to foreign host markets(Tallman, 1992).

Internalization models use transaction cost economics(TCE) as the primary theoretical lens to explain firms’ internationalization(Coase, 1937; Williamson, 1975). Internalization refers to “the decision to internalize across borders intermediate goods transactions that are inefficient or subject to failure when left to international market forces”(Tallman, 1992: 457). As discussed by Williamson(1975), firms tend to begin with markets(exporting/ importing) and eventually evolve to international multidivisional forms due to the excessive transaction costs associated with using external markets. As long as the marginal cost of hierarchies(administrative costs) does not exceed that of markets (transaction costs), the firm will expand to absorb the transaction cost.

The resource-based view of the firm and managerial concepts of strategic management are used to develop the strategy and managerial perspective arguments. As discussed in Tallman’s insightful work(1992), resource-based view(RBV) strategies recognize that sustained abnormal returns are based on the firm deploying unique resources rather using market power. Resource based view theories suggest that sustained competitive advantage can be achieved by maintaining valuable, rare, inimitable and non-substitutable resources(Barney, 1991). Whereas the oligopolistic and TCE models focus on external factors(e.g., markets), the resource-based view is firm-specific. Thus, firm-level managerial decisions become significant to multinational strategies when such idiosyncratic elements are introduced(Tallman, 1992).


More importantly, from a managerial perspective, economic factors(e.g., transaction costs) do not automatically determine firm-level action, but are significantly filtered through managerial mindsets(Perlmutter, 1969).

We acknowledge that Dunning’s(1980; 1995) eclectic paradigm has been suggested as an important theoretical lens to explain firm-level internationalization;(Rugman and Verbeke, 1992). The three elements of this theory are ownership-specific advantages, location-specific advantages and internalization advantages, and this seminal approach has integrated the previously fragmented theory of internationalization. However, despite the comprehensive nature of this framework, researchers have questioned the level of analysis(e.g., Rugman and D’Cruz, 2000; Itaki, 1991). For example, Itaki(1991: 453) argued that there is an inseparability of the “ownership advantage” from the “location advantage” because whether an ownership advantage(e.g., a specific technology) turns out to be profitable is subject to the combination of firms’ input coefficients and a country’s input prices. We believe that this confusion occurs because of the problems associated with mixed levels of analysis(i.e. ownership advantages are not independent from location advantages because firm-level characteristics are inherently nested in country-level influences).

To address this issue, we categorize the determinants of inter nationalization into two separate levels of analysis: firm-(micro) and country-(macro) levels. Rugman and Verbeke(1992) also concluded that the international configuration of the MNE fundamentally depends not only upon its stock of firm-specific advantages but also on its use of country-specific advantages. A firm’s international spread will be enhanced if the firm is able to leverage benefits of comparative(country-specific) and competitive(firm-specific) advantages(Tallman and Yip, 2001). In the next section, we explain firms’ internationalization using firm-and country-level drivers.


Ⅲ. FIRM-LEVEL DRIVERS OF INTERNATIONALZANTION

1. Oligopoly Power

Hymer’s(1976) MNE theory shifted the research focus of international business from the country to the firm level. The view that the existence of the MNE could be explained by arbitrage theory(i.e., difference in interest rates) was generally accepted by economists until Hymer(1976) questioned it in his dissertation(Hennart, 2001). Because arbitrage theory could not explain why those who undertake FDI tended to be manufacturers rather than banks, Hymer’s oligopolistic view of the MNE gained acceptance.

Building on the oligopolistic power model, a number of authors augmented this approach. For instance, Calvet(1981) suggested that the existence of monopolistic power allows control of product knowledge and encourages investment abroad. Additionally, Hymer(1976) found that firms expanded overseas because they possessed a proprietary advantage that enabled them to out-compete local competitors. Caves(1971) suggested that successful firms producing a differentiated product were likely to expand overseas because they could transfer knowledge gained in servicing the domestic market to international markets at little additional cost. Similarly, Vernon’s (1971) product life cycle theory supports a market-dominant firm’s international expansion, allowing the firm to capture remaining rents in different countries. Thus, we propose that a firm’s market power will be positively associated with its internationalization.

Hypothesis 1a : The greater the market power a firm possesses, the

greater its propensity to expand internationally.

Another insight stemming from Hymer’s(1976) early work is his discussion of competitive movements. He suggested that the reason why


MNEs would choose not to license to local firms is not due to efficiency. Rather, he argued that FDI is a more effective means by which to preempt the growth of local competitors. In other words, the MNE is a manifestation of oligopolistic reaction, focusing on ‘follow the leader’ and ‘exchange of hostages’ behavior(Hennart, 2000: 131). More recent research has shown that firms face competitive pressures to become more international(Hamel and Prahalad, 1994). As argued by Porter(1980: 88), the theory of ‘Interfirm rivalry’ also suggests that “firms feel the effects of competitors’ moves and are prone to respond to them.” In other words, as the degree of multi-market contact between firms in a given market increases, their aggressiveness toward each other in that market may be attenuated by the threat of retaliation; this tampering of aggressiveness is known as “mutual forbearance” (Edward, 1955). As such, internationalization may be explained by firms’ competitive response to competitors.

Hypothesis 1b : The greater foreign competition a firm faces in its domestic

market, the greater the propensity to expand internationally.

2. Transaction Cost Economies(TCE)

Transaction cost economics attempts to explain “why MNEs organize international interdependencies that could also be handled by markets” (Hennart, 2000: 131). The important consideration is that markets are imperfect and these imperfections arise because human managers exhibit ‘bounded rationality’ and ‘opportunism’(Williamson, 1975). According to the transaction cost approach(Williamson. 1975), the frequency, uncertainty, and specificity of assets dedicated to a particular transaction influence the costs associated with market contracts. When market transaction costs exceed those associated with hierarchical governance, markets fail and transactions are absorbed within the firm.


Hymer(1976) noted that managing suppliers is one of the most important managerial decisions. He reasoned that a firm would integrate suppliers into its own bureaucratic network instead of using the market to buy factors of production when market transaction costs exceed those associated with internalization. If market for supply were perfect, then a firm would have no incentive to vertically integrate. We examine the specific case of high market uncertainty(e.g., shortage of supplies), in which case a high degree of dependence will not lead to increased efficiency. In this case, a high degree of supplier dependence on foreign companies may threaten a firm’s competitive position. We argue that if a firm faces a high degree of dependence on foreign material/supply companies, it may undertake international vertical integration in an attempt to neutralize this threat. Thus, we expect that a firm’s material/supply dependence on foreign firms will be positively correlated with its propensity to internationalize its operations.

Hypothesis 2 : A firm’s material/supply dependence on foreign companies will be

positively associated with its propensity to expand internationally.

3. Strategy and Managerial Perspective

The strategy and managerial perspective implies that economic determinism, a key assumption of the oligopoly power and transaction cost economics models, must be revised based on behavioral models(Tallman, 1992). In particular, internationalization has been characterized as a high risk activity(e.g., liability of foreignness)(Hymer, 1976). Without proper control mechanisms, managers’ have little incentive to take risks. To overcome this risk-averse behavior, acquiring an equity stake in the organization has been viewed as one of the most important factors that may promote managers’ propensities to engage in high-risk decisions(Eisenhardt, 1989). In support of this reasoning, agency theory(Jensen and Meckling, 1976) also has shown


that equity ownership influences managers’ risk-taking propensities(Zajac and Westphal, 1994) and the resultant willingness to assume the risks associated with internationalization(George et al., 2005). Thus, we posit that ownership may give managers an incentive to assume the risks associated with internationalization(Sanders and Carpenter, 1998).

Hypothesis 3a : Manager’s stock ownership will be positively associated

with a firm’s propensity to expand internationally.

Upper echelons theory(Hambrick and Mason, 1984) suggests that the top managers’(TMs) characteristics, values, and cognitive biases are reflected in organizational outcomes. Because internationalization requires a firm to change the boundaries and nature of competition(Sanders and Carpenter, 1998), making a decision to expand internationally requires that managers possess high-level managerial skills, such as the ability to undertake market analysis and make difficult decisions(Sanders and Carpenter, 1998). To undertake the complex analysis and decision making associated with foreign expansion, it is important that the TMs have adequate cognitive capability. Based on empirical evidence, Hambrick and Mason(1984) showed that the TM’s education level is an important indicator representing the adequate cognitive capability for decision making. Davis and Harveston(2000) also show that the educational attainment of entrepreneurs affected their strategic choices involving new domains. As such, we expect that a high degree of TMs’ educational level will be positively correlated with internationalization.

Hypothesis 3b : The education level of a firm’s top managers will be positively associated with its propensity to expand internationally.

Upper echelons theory says that TMTs(top management teams) will make strategic decisions that are consistent with their experiences(Finklestein and


Hambrick, 1992) and strategic choice theory argues that TMTs have significant influence over organizational outcomes, including diversification, export orientation, and international expansion. Perlmutter(1969) argues that the reality of MNEs cannot be understood merely by examining data on foreign sales and foreign employees. Instead, he argues that research should give “serious weights to the way executives think about doing business around the world”(Perlmutter, 1969: 11). As asserted by Tallman and Yip (2001: 322), internationalization has become more “a matter of perceptual horizons and the scope of strategic intent than of specific means for foreign market entry.” In fact, a decision-maker’s past history and experiences may be important indicators of internationalization. Research indicates that executives develop biases, attitudes, values, aspirations and behaviors based on lifelong experiences(Sambharya, 1996). For instance, a manager’s experience with another international firm may have provided this decision maker with valuable contacts and knowledge of relevant export markets (Wiedersheim-Paul et al., 1978). In support, Trevino and Grosse(2002) found a positive relationship between the international experiences of firms’ TMs and internationalization. As such, we propose:

Hypothesis 3c : The foreign experience of a firm’s top managers will be positively associated with its propensity to expand internationally.

Ⅳ. COUNTRY-LEVEL DRIVERS OF INTERNATION- ALZANTION

1. National Cultures

National culture has been observed to be the most influential factor that can explain country-level differences in firm behaviors(Busenitz et al.,


2000). House et al.(1994) classified the culture of a country based on its position relating to four variables, namely uncertainty avoidance, power distance, individualism/collectivism, and performance orientation. In order to complete our multi-level model, we study each of these constructs and its relationship to the likelihood of firms expanding internationally.

Uncertainty avoidance is the extent to which members of an organization or society strive to avoid uncertainty by relying on established social norms, rituals, and bureaucratic practices(Hofstede, 2001; House et al., 2004). Firms in weak uncertainty avoidance countries exhibit a higher level of tolerance for change and ambiguity, and they accept and often embrace the risks associated with an uncertain future(Jones and Davis, 2000). Research shows that the process of internationalization involves unanticipated changes and risk because of the inherent liability of foreignness(Shane, 1994). Thus, we expect that firms operating in high uncertainty avoidance societies will be more likely to expand internationally.

Hypothesis 4a : The country-level cultural value of uncertainty avoidance will be negatively associated with a firm’s propensity to expand internationally.

Power distance refers to the degree to which members of a society expect power to be distributed(Hofstede, 2001; House et al., 2004). A high power distance society is one in which a high degree of inequality and hierarchy exist and are considered acceptable. In low power distance societies, people see themselves as relatively equal(Hofstede, 1994). In addition, research indicates that power distance corresponds to the need for hierarchical control (Shane, 1994). In high power distance countries, where authority and decision making processes tend to be centralized, firms tend to use hierarchical structures with a relatively larger proportion of supervisory personnel (Makino & Neupert, 2000). Because high power distance cultures have


organizations with more hierarchy than low power distance cultures, this might encourage direct investment over exporting or licensing. Because maintaining operations in other countries is a hierarchical control, we propose,

Hypothesis 4b : The country-level cultural value of power distance will be positively

associated with a firm’s propensity expand internationally.

In the cultural model, performance orientation has been contrasted with ascription-directed culture(Trompenaars and Hampeden-Turner, 1998). Rather than being ascribed based on location in social networks or by inherited statuses, performance-oriented societies value the outcome of efforts. Successful goal accomplishment becomes the primary measure of personal value in high achievement cultures(Cullen et al., 2004). Research has demonstrated that the more achievement values dominate a culture, the higher priorities to outcomes and the fewer concerns with the means of achieving those outcomes(Cullen et al, 2004). Achievement values, therefore, are more likely to encourage the rule-breaking mindset of ‘ it’s not how you play the game, it’s whether you win or lose’(Messner, and Rosenfeld, 2001; 63). Extending this reasoning, there are many advantages associated with international expansion, including location, experience, economies of scale and scope, increased market size, and the opportunity to stabilize returns(Hitt et al., 2007). To respond to these opportunities, if a society possesses a strong cultural value of performance orientation, firms in that society may be more open to internationalization because recent research has found a positive relationship between the degree of internationalization of the firm and its profitability(Contractor et al., 2003). Taken collectively, we propose:

Hypothesis 4c : The country-level cultural value of performance orientation will be positively associated with a firm’s propensity to expand internationally.


Research has shown that individualistic concerns refer to self-centered orientation and egoistic goal pursuit(Messner and Rosenfeld, 2001). Individualistic cultures are, in general, more competitive, and these competitive pressures encourage society’s members to ignore traditional normative restrictions in the interest of personal success(Messner and Rosenfeld, 2001). Because individualism creates a more entrepreneurial environment by encouraging disengagement from the collective, this mindset may lead firms to internationalize their operations rather than focusing strictly on domestic markets. The concept of opportunism in transaction cost economics also supports this argument. According to Shane(1994), if a culture is less opportunistic and more trusting, they will have less reason to resort to hierarchies than other cultures operating under the same objective economic conditions. Thus, maintaining physical operations abroad would be less common in theses cultures.

Hypothesis 4d : The country-level cultural values of in-group collectivism

will be negatively associated with a firm’s propensity expand internationally.

2. Social Institutions

In addition to national culture values, institutional theory envisions social institutions as country-specific drivers(Cullen et al., 2004; Messner and Rosenfeld, 2001). As acknowledged by Porter(1980), social institutions play a significant role in the development of home country advantages. Institutions, therefore, can augment firm specific advantages. In particular, research shows that education is a key social institution that may affect innovation and organizational learning(Westwood and Low, 2003). As noted by Kogut and Zander(1993), internationalization always goes hand-in-hand


with learning, and education provides important mental-bases for this learning mechanism. Meyer(2004) also argued that the educational system enhances the availability of skilled labor and a country’s absorptive capacity. We expect that high levels of educational attainment in a country will be positively correlated with firms’ internationalization.

Hypothesis 5a : The country-level educational attainment will be positively

associated with a firm’s propensity expand internationally.

According to Boddewyn(1988), political components of MNE theory have usually been ignored in international business literatures and that dominant models of MNEs(e.g., Dunning’s eclectic paradigm) could be significantly enhanced by incorporating political dimensions. At the country level, political risk has been recognized as one of the most important threats facing MNEs (Boyacigiller, 1990). Research shows that the ability of a government to credibly commit to a set of policies is of substantial interest to a firm’s strategic behavior(Korbin et al., 1980). Where policy credibility is low, firms minimize commitments to a market, or avoid investment altogether (Henisz and Delios, 2001). Research also shows that political stability is related to property rights. Examining the emergence of new firms in five formerly-soviet countries, Johnson et al(2000) found that political instability was positively associated with insecure property rights. This concern for property rights may act as a disincentive to new domestic business formation while stimulating an incentive to move to other countries with higher political stability. Thus, we propose,

Hypothesis 5b : Political instability in the home market will be positively associated with a firm’s propensity to expand internationally.


Ⅴ. METHODS

1. Sample

In order to test our hypotheses, we assembled a multilevel data set at both the firm-and country-levels of analysis. All individual data for the present study came from the Investment Climate Surveys(ICS)(The World Bank Group, 2005). The database provides comparable information on firm characteristics for all of the countries under study. The survey captures business perceptions regarding the largest obstacles to enterprise growth, the relative importance of various constraints to increasing employment and productivity, and the effects of a country’s investment climate on its national competitiveness. An investment climate survey is normally carried out under the auspices of a national stakeholder, such as an employers association, a development research institution, an indigenous development agency or the central statistical bureau. The observation instrument includes a written questionnaire and face-face-face interviews with managing directors, human resource managers or accountants by professionally qualified enumerators. Detailed information on the ICS is available from the World Bank Group (www.worldbank.org).

From the ICS sample, relevant data were available for the 27 countries that correspond to our GLOBE study cultural variables(House et al., 2004) and social institution data. Sixty-eight percent of firms in our final sample of 26,859 firms are from manufacturing industries, while 25% are from service industries, with the remainder distributed among agriculture, construction management, and other industries. Consistent with ICS’ overall sample, the majority(approximately 90%) of our sample consists of small-to medium-sized firms(i.e. less than 500 employees), as one would expect given that most of the world’s firms are small to medium-sized. The median age of sampled firms was 15 years at the time of ICS data collection.


2. Variables and Data Sources

(1) Dependent variables As noted by Buckley and Casson(1976), the effect of international expansion

on firm profitability has produced mixed results because different authors have used different measures of the degree of internationalization. To overcome this issue, an internationalization index based on multiple predictors has been prescribed(Sullivan, 1994), but the psychometric properties of this type of index are still debatable(Ramaswamy et al., 1996). Because we are interested in whether a focal firm has operations in other countries, and because we need a clear operationalization of internationalization, the dependent variable was measured dichotomously. This variable is measured by asking “Does your firm have holdings or operations in other countries?” and the responses are coded as Yes=1, No=0.

(2) Firm-level variables(Level-1) In order to test our firm-level arguments, we used data from the ICS

survey measuring ① oligopoly power model, ② TCE model, and ③ strategy and managerial perspective model.

The oligopoly power model was supported by survey questions relating to market power and mutual forbearance. The market power variable was measured by an ordinal survey instrument in which firms were asked a hypothetical question regarding what impact a price increase in its main product line would have on sales. To test mutual forbearance, firms were asked how many foreign competitors they faced in their domestic markets.

The TCE model is supported by measures of supply dependence. Supply dependence is measured continuously by the percentage of a firm’s material inputs and supplies that are imported directly.

In support of our hypotheses regarding the managerial mindset, three


variables are employed, namely management ownership, TM education levels, and TM foreign company experience. Management ownership is measured dichotomously by whether the principal owner is also the manager/director. TM education is measured ordinally by the highest level of education of the top manager. TM foreign company experience is measured ordinally by the number of years of international experience of the top manager prior to managing the focal firm.

(3) Country-level variables For achievement orientation, uncertainty avoidance, and in-group

collectivism, we used measures from the GLOBE(Global Leadership and Organizational Behavior Effectiveness) study by House et al.,(2004). Two characteristics of the GLOBE study were relevant to our work. First, GLOBE researchers conducted organization- and country-level analyses rather than an individual-level analysis. Using confirmatory factor analysis, Hanges and Dickson(2006) tested GLOBE dimensions and confirmed that GLOBE represents adequate organization- and nation-level scale properties based on the fact that they did not factor together at the individual level. Since we developed our theory based partly on the firm level of analysis, GLOBE dimensions are inherently consistent with the study’s objectives. Second, the GLOBE study’s scales were designed primarily to differentiate between organizational and societal cultures. They were not specifically developed to measure differences within cultures or between individuals. Thus, the scales are appropriate to compare the 27 countries in our level-2 sample. As the GLOBE project stresses, “the scales are most immediately useful to cross-cultural rather than intracultural researchers”(House et al., 2004 : 146). We also used the adjusted scores for the GLOBE measures (House et al., 2004) to eliminate culturally biased response patterns(i.e., Asian respondents tend to avoid the extreme ends of a scale whereas Mediterranean people tend to avoid the midpoint of a scale).


The dimension of uncertainty avoidance is defined as “the extent to which members of collectives seek orderliness, consistency, structure, formalized procedures, and laws to deal with situations in their daily lives(α= .77)” (House et al., 2004: 603). Power distance refers to “the degree to which members of an organization or society expect and agree that power should be shared unequally(α= .80)(House et al., 2004 : 527). Performance orientation refers to “the extent to which a community encourages and rewards innovation, high standards, and performance(α= .72)”(House et al., 2004: 239). The GLOBE measure for in-group collectivism refers to “the degree to which individuals express pride and loyalty to, and interdependence toward, their family(α= .88)”(House et al., 2004 : 463).

(4) Social institutions We borrowed our measure of country-level social institutions from those

commonly used in the political economy and sociology literatures. These measures have been used in business and management research and are accepted as valid measures(Cullen et al., 2004). Our education variable is measured as educational attainment and is taken from the United Nations Development Program’s(http://hdr.undp.org/statistics/statistics.htm) educational attainment score, a commonly accepted indicator of country-level emphasis on education in previous research(e.g., Parboteeah and Cullen, 2003; Cullen et al., 2004). The educational attainment is computed as two-thirds of the adult literacy rate plus one-third of the mean year of schooling.

For political stability, we used an aggregate measure of indicators by the World Bank(Kaufmann, 2005). The index of political stability refers to perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including political violence and terrorism. This index captures the notion that the quality of governance in a country is compromised by the likelihood of wrenching changes in government. This indicator aggregates the efforts from numerous


institutions, such as the World Bank(the Governance Indicators), World Economic Forum(the Executive Opinion Survey), Transparency International (Corruption Perception Index), and Freedom House(political and civil liberties and freedom of the press). This indicator covers more than 200 countries, based on more than 350 variables, obtained from dozens of institutions worldwide. To adjust for differences in the metrics of component indicators, we standardized all composite measures for national culture and institutional variables.

(5) Control variables. In order to rule out alternative explanations, we control for several

variables based on previous research. We control for GDP(Gross Domestic Product in U.S. dollars) because low GDP is a country-level disadvantage that limits the firm. These limitations include a limited national technology infrastructure and limited market capacity for the development of country-based advantage(e.g., new technologies and mass markets)(Pianta, 1995). The values for GDP were obtained from the United Nations Human Development Report(2002) and transformed logarithmitically before the analysis. We control for firm size because larger operations lead to economies of scale and scope, learning curve effects, increased market power as buyer and supplier, and other benefits(Tallman and Yip, 2001). We also control for the effect of firm age because a firm may require time to accumulate adequate resource and knowledge before internationalizing its operations. We control for two ownership variables that may influence the results of our management ownership variables. We also control for use of foreign technology and human labor to reduce alternative explanations for TCE. Research shows that state-owned firms may be characterized by a lack of technological, financial, and managerial resources and foreign ownership is associated with a high degree of openness and a closer relationship with international capital markets(Rubach and Sebora, 1998). State ownership is


measured as the percentage of the firm that is owned by the government/state. Foreign ownership is measured as the percentage of the firm that is owned by foreigners(private sector). To support the managerial perspective argument, we control for the top manager’s experience of export companies. Lastly, because current market share may influence the market power of a firm, we control for the firm’s market share to accurately examine its market competitiveness.

(6) Analysis technique Hierarchical linear modeling In this paper, we provide a multi-level analysis detailing how

country-specific advantages(e.g., national culture and social institutions) influence firm-specific advantages. This nested level of analysis induces the problem of independence of observations. Because the assumption of independence is violated in the presence of hierarchical data, simple logistic regression methods cannot handle this kind of data. Logistic regression methods produce standard errors that are too small and, in turn, this leads to a higher opportunity of rejection of a null hypothesis than if the data included independent observations(Osborne, 2000). One statistical technique that has been used in organizational literatures as an effective tool for analyzing multi-level conceptual models is hierarchical linear modeling (HLM)(Hofmann, 1997). Because our dependent variable is a dichotomous variable, we use Hierarchical Generalized Linear Model(HGLM) (Bryk and Raudenbush, 1992). Underlying the logic of HGLM is that two models for the estimations of country level parameters(Level 2) and firm level parameters (Level 1) are computed simultaneously: one modeling relationships within each of the lower level units, and a second modeling how these relationships within units vary between units(Hofmann, 1997). This approach can explicitly model both individual and group level residuals and, therefore, we can take into account the partial interdependence of individuals within the same group.


Variables Mean S.D. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

1. Size 1.99 0.99 12. Year 5.43 1 0.11 13. State_own 5.78 22.6 0.14 0.18 14. Foreign_own 9.48 26.7 0.06 -0.04 -0.08 15. Mgr_own 0.44 0.50 -0.10 -0.06 -0.22 -0.21 16. MS 8.14 20.2 0.04 0.10 0.00 0.06 -0.12 17. Market power 2.39 0.79 0.02 -0.01 0.09 0.01 -0.07 0.01 18. Foreign_competi 17.03 369.5 -0.00 -0.01 0.03 0.00 -0.04 -0.01 0.01 19. Tech_dep 0.04 0.19 0.06 0.05 -0.03 0.18 -0.06 0.13 0.00 -0.00 110. Supply_dep 10.63 26.4 0.01 0.03 -0.07 0.24 0.02 0.03 -0.02 -0.01 0.11 111. Foreign-labor 0.49 4.88 -0.00 0.01 -0.02 0.04 0.01 0.03 0.01 -0.00 0.02 0.01 112. TM_edu 4.36 1.16 0.08 0.04 0.07 0.14 -0.05 0.05 0.04 -0.01 0.11 0.06 0.02 113. TM_for 2.11 2.64 0.03 -0.02 -0.01 0.23 -0.01 -0.00 0.01 0.01 0.15 0.08 0.04 0.10 114. TM_expo 0.08 0.27 0.05 0.01 -0.04 0.18 -0.02 0.12 -0.04 0.01 0.24 0.13 0.02 0.08 0.25 115. DV 0.05 0.22 0.05 0.06 -0.04 0.28 -0.05 0.05 -0.01 -0.01 0.14 0.20 0.03 0.08 0.12 0.12 116. Uncer 4.93 0.43 0.07 -0.03 0.06 0.07 -0.34 0.15 0.06 0.04 0.09 0.05 -0.01 -0.04 -0.02 0.13 -0.07 117. Power 2.80 0.33 0.04 -0.01 0.12 0.04 -0.32 -0.01 0.05 0.04 -0.02 0.04 -0.03 0.01 -0.04 -0.02 -0.13 0.31 118. Ingro 5.54 0.34 -0.04 0.03 -0.16 0.03 0.05 0.06 -0.01 -0.05 0.09 0.20 -0.00 -0.04 0.03 0.03 0.07 0.07 -0.17 119. Perfo 5.87 0.29 -0.05 0.12 -0.13 -0.05 0.24 0.03 -0.10 -0.03 0.07 0.05 0.04 -0.01 0.03 0.06 0.06 -0.17 -0.28 0.34 120. Edu 0.83 0.14 -0.00 -0.08 0.07 0.02 -0.04 -0.14 -0.05 0.00 -0.06 -0.14 -0.08 0.05 0.02 -0.11 0.10 -0.32 -0.20 0.02 -0.05 121. Pol 0.09 0.63 -0.03 -0.03 0.03 0.02 0.07 -0.25 -0.09 0.01 -0.14 0.00 -0.07 0.00 0.00 -0.15 0.02 -0.38 0.02 -0.12 0.23 0.54 122. GDP c) 8961 7582 -0.05 -0.01 -0.05 -0.01 0.21 -0.19 -0.08 -0.02 -0.10 0.01 -0.05 -0.01 -0.01 -0.14 0.10 -0.66 -0.34 -0.01 0.08 0.61 0.74 1

Ⅵ. RESULTS

<Table 1> provides a matrix of correlations and sample statistics of the variables used in this study: total sample. To equalize the contribution of each country regardless of sample size, we weighted data by sample size of each country. We also checked the correlations separately based on level-1 and level-2 variables, respectively. The examination of the correlation matrices indicates that there is no cause for concern.

<Table 1> Descriptive Statistics and Cross-Level Correlations a), b)

a) Correlations of .01 or greater are significant at p < .05. Correlations greater than .02 are significant at p< .01

b) Level 1: n=2, 6859, Level 2: n=27c) GDP was log transformed prior to analysis


Before examining a more complex level-1 model, in HGLM, an unconditional model can show whether this model is relevant to a multilevel model. More specifically, the HGLM gives us the intraclass coefficient which indicates the existence of significant variation among firm-level variables (Snijders and Bosker, 1999; Arregle et al., 2006). To do so, we conducted a multilevel Bernoulli analysis without any independent variable at both levels, where ijf is the probability of becoming international for firm i of country j. The binomial dependent variable, defined as the probability that a firm will be an international firm (1) or not (0), is ijh the log of the probability. The model for Level 1 with a logit link function becomes:

Level 1 : ijh = log[( ijf )/1- ijf )] = β0jLevel 2 : β0j = γ00 + u0j

Following the formula by Snijders and Bosker(1999)(See also Arregle et al., 2006: 607), we calculated the intraclass coefficient for the logistic model : 2t =2.55, r =0.44. This implies that 44 percent of the variance of internationalization decisions is explained at the firm-level. Chi square statistics (1226.95, d.f.=26, p=0.00) suggest that this model is appropriate for a multilevel analysis and, as such, we move on to the complex model. Table 2 reports the results of HGLM analyses, including standardized coefficients of country level and individual level variables predicting internationalization. In general, results show substantial supports for our firm-level hypotheses.

For the oligopoly model, we expected that marker power would be positively associated with internationalization but its effect is not significant. Thus, hypothesis 1a is not supported(β=0.03). However, hypothesis 1b, which posited that the more foreign competitors the focal firm faces in the domestic market, the more likely it would be to internationalize its operations, was positive and significant(β=0.001; p< .001).


Variables Parameter Estimatesb s.e Firm Level(Level 1) Oligopoly Power Market Power 0.03 0.02 Foreign Competitors 0.00 *** 0.00 Transaction Cost Economy Supply Dependence 0.01 *** 0.00 Strategy and Managerial Perspective Manager ownership -0.45 *** 0.07 TM Education 0.16 *** 0.02 TM Foreign Co. Exp. 0.01 0.01 Country Level(Level 2) National Culture Uncertainty Avoidance -0.58 * 0.26 Power distance 0.58 ** 0.20 Performance Orientation 0.62 * 0.24 In-group Collectivism -0.78 ** 0.23 Social Institutions Education 0.88 ** 0.25 Political Stability -0.13 0.31 Control Variables Firm Size 0.09 0.06 Firm Age 0.15 *** 0.03 State ownership -0.01 *** 0.00 Foreign ownership 0.02 *** 0.00 Tech. Dependence 0.47 *** 0.09 TM Export Co. Exp. 0.51 *** 0.07 Use of Foreign Labor 0.01 ** 0.00 Market share 0.01 *** 0.00 GDPa) -0.64 0.71

<Table 2> Results for HLM Analysis of Internationalization

a) GDP was log transformed prior to analysisLevel 1: n=2, 6859, Level 2: n=27; †p< .10, *p< .05, **p< .01, ***p< .001.


As hypothesized, all of the three variables for the TCE model(supply dependence) had a positive and significant effect on internationalization(β= 0.47; p< .001). Thus, hypothesis 2 are supported, providing robust support for the TCE model.

The managerial perspective model met with mixed results. Manager’s ownership(hypothesis 3a) was significant but directionally opposite to what was hypothesized(β= -0.45; p< .001); thus, hypothesis 3a was not supported. The TM’s foreign company experience(hypothesis 3c) was directionally supported but insignificant; thus hypothesis 3b was not supported.

Moving to the level 2 analysis, country-level cultural hypotheses, when adjusted for firm differences, all showed significant effects. As expected, power distance and performance orientation were positively associated with internationalization(β=0.58; p< .01, β=0.62; p< .05) while uncertainty avoidance and in-group collectivism were negatively related to internationalization(β= -0.58; p< .01, β= -0.78; p< .01). Thus, hypotheses 4a-4d all were supported. Shifting gears to social institutions, educational attainment, as anticipated, we positively correlated with firms’ internationalization(β=0.88; p< .01). Political stability was insignificant (β= -0.13); thus, hypothesis 5b was not supported.

Ⅶ. DISCUSSION

Our multi-level model provides strong support for the effects of both firm- and country-specific advantages on firms’ decision to internationalize. Turning our attention to the first of our firm-level arguments, namely market power, surprisingly the existence of monopolistic power was not an impetus to internationalization, as we expected. Although this result is surprising, it is important to view it alongside our finding on competitive pressures, namely that firms will seek out foreign markets more rapidly if they face


increased foreign competition in their domestic market. Our hypothesis on competitive pressures was supported and this is consistent with more recent research on market power(Hamel and Prahalad, 1994). Because Hymer’s work on internationalization involved larger and more mature companies which had time to develop market power, economies of scope and the deployment of underutilized resources in international markets may have been the primary impetus for internationalization during that time. However, because the present study involves younger companies in the 21st century, it may be that either they have not had sufficient time to develop market power or they do not feel confident in indicating that they possess it due to the hyper-competitive environments in which they operate. If this is the case, the primary motivation for international expansion may be competitive pressures faced in the domestic market. Our result on competitive pressures is highly consistent with our findings related to transaction cost economics as discussed below.

Our multi-level model provided strong support for our argument that, when highly dependent on a foreign firm for an important resource into the production process, firms will undertake international expansion, presumably using vertical integration to reduce this dependency. As such, increased dependence on foreign companies for supplies leads to a transaction cost economics decision in favor of hierarchies over markets. When faced with strong competitive pressures, the decision to internalize these transactions provides strong support for our firm-level arguments grounded in transaction cost economics.

While the first two firm-level theories dealt with competition and firms’ competitive responses, the third shifts to the manager. Our hypothesis on managers’ ownership is not supported as it was directionally opposite to our hypothesis. Because agency theory suggests that a manager’s stock ownership is a good control mechanism to prevent an agent’s divergent behavior, this result shows a contradictory finding. We believe that there are


at least two possible explanations for this unexpected finding. First, managers may not consider internationalization to be a high-risk decision. Because internationalization allows the firm to exploit market imperfections, to increase economies of scale and scope, to reduce costs and increase revenues, and to enhance learning and knowledge, it may be that modern managers are confident that they can overcome the liability of foreignness or that, as a result of globalization, the liability of foreignness is not as acute as it once was. The other possible explanation is that the effect of manager’s ownership may vary based on the true purpose of stock ownership. Research shows that management often adopt employee stock ownership plans(ESOP) to enhance entrenchment by placing a large block of the company’s shares under the control of company managers and employees that are under the supervision of management. As a result, even if ESOP increases, management will likely behave in a risk-averse manner, thus decreasing its commitment to international markets(Gamble, 2000). Rather than the dichotomous variable(yes or no), detailed motivation about the relationship of managers’ ownership to internationalization should be investigated in future studies.

We expected that if a manager had previous work experience for foreign firms, the manager might have developed industry-specific knowledge and contacts which could facilitate international expansion in his/her present firm. Although this hypothesis was directionally supported, the coefficient was insignificant. A possible explanation is that once foreign companies are localized, they may lose their international perspective. As institutional theory argues, MNEs tend to confront the pressure for isomorphism to gain legitimacy. Also, it is possible that even if a manager worked for a foreign company, his/her job may or may not have had an international component. In fact, our control variable of export company experience provides partial support for this argument as results indicate a strong positive relationship between a manager’s previous export company experience and firms’ internationalization. The direct experience of exporting, rather than simply


working for a foreign company, appears to be more important when it comes to the likelihood of internationalization.

Results of the present study provide strong support for our first level of analysis, namely that firm-specific and competitive conditions lead to firm pressures to internationalize their operations. Our macro level of analysis, namely country condition, suggests that a multi-level model incorporating both country conditions with firm-level capabilities offers a more complete explanation of cross-border investment flows. Significant results for all four national culture dimensions under study confirm that national culture is the most influential factor that can explain country-level differences in firm behaviors(Busenitz et al., 2000). These results extend previous research because they demonstrate the distinctive impact of culture on internationalization. More specifically, we show that uncertainty avoidance and in-group collectivism are negatively associated with internationalization while power distance and performance orientation are positively associated with this construct.

Turning our attention to the impact of social institutions on internationalization, we found a strong relationship between education and internationalization while political stability was not supported. This is an important finding inasmuch as it confirms earlier research that suggests that education is a key social institution that affects innovation and organizational learning(Westwood and Low, 2003). Extending research by Kogut and Zander (1993), learning appears to also go hand-in-hand with internationalization. Future research may examine the bi-lateral relationship of these constructs in an attempt to uncover which comes first. Given that political risk has been viewed as one of the most important threats facing MNEs(Boyacigiller, 1990), the latter result is somewhat disappointing. One possible explanation is that home country political instability may be coupled with insufficient national support for internationalization. If this proves to be the case, it may be that young firms may not be able to overcome the risks associated with internationalization in the absence of other firm-and country-specific advantages.


Ⅶ. CONCLUSION

As Nelson(1991) suggested, research from the strategic management perspective has shown that firm level variables are discretionary to a considerable degree. In sharp contrast, the inclination of economists has been to focus on “macro or environmental level variables, and to play down or ignore the role of firm discretion”(Nelson 1991: 63). This study has attempted to bridge this theoretical gap based on a multi-level of analysis. More specifically, we consider not only firm-level but also country-level factors to explain a firm’s propensity to internationalize and our approach demonstrates the utility of using HGLM to handle such multi-level arguments. We also consider the impact of social institutions rather than relying on the often studied national culture variables alone because researchers agree that both national culture and social institutions can explain cross-national differences. In this study we confirm that a nation’s educational attainment is indeed an important social construct that has explanatory power distinct from cultural values. Finally, we address the sample limitation of previous internationalization research by using a unique data set of over 26,859 firms from 27countries.

Although we were able to develop theoretically grounded and reliable measures for testing our arguments, this study is not without limitations. First, because this study measured internationalization dichotomously, a limitation of the study is that it is not able to measure the degree of internationalization of the firm and the destination of internationalization. In spite of this shortcoming, we believe that the multi-level nature of this study, coupled with its large sample size, overcomes these limitations. Second, because of the complex nature of relationships, this study could not develop the interaction model between level 1 variables and level 2 variables (slopes-as-outcome models). If researchers desire to fully utilize the benefits of a multi-level model, an extension of the present research would be to investigate cross-level interactions.


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Firm-and Country-Specific Advantages - … Country-Specific Advantages: A Multi-Level Analysis of Internationalization 7 that the relationship between the industrial organization model