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Liability of country foreignness and liability of regional foreignness: Their effects on geographic diversification and firm performance

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Abstract

The costs of inter- and intra-regional diversification have been widely discussed in the existing international business literature, but the findings are mixed. Explanations for the mixed findings have important managerial implications, because business managers have to estimate accurately the costs of doing business within and across regions before they make their internationalization decisions. To explain the existing mixed findings, this study differentiates between liabilities of foreignness at the country and regional levels, and explores the joint effects of liability of country foreignness (LCF) and liability of regional foreignness (LRF) on the performance of internationalizing firms. Using data from 167 Canadian firms, we find that LCF may not necessarily be negatively correlated with intra-regional diversification, but LRF is positively correlated with inter-regional diversification. LCF moderates the relationship between LRF and inter-regional diversification, and also mediates the relationship between intra-regional diversification and firm performance. LRF mediates the relationship between inter-regional diversification and firm performance. Missing one or more of these variables may result in different cost estimates. Identification of the relationships between these variables helps to improve the accuracy of estimating the costs of doing business aboard.

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Notes

  1. The names of sample firms were taken from the Canadian government website at http://www.ic.gc.ca/eic/site/ic-ic.nsf/eng/home. We chose Canadian firms because they had a high degree of internationalization (UNCTAD, 2008).

  2. The accounting conventions used by non-manufacturing firms (e.g., banks, insurance companies, and oil companies) were significantly different from those used by manufacturing companies. In addition, there were substantial differences among service companies in their disaggregation of financial data by business activity (Grant et al., 1988).

  3. The measure considers two levels of sales: the sales in countries within regions, and the sales across regions.

  4. The definition and sources of regional economic indicators were derived from the annual World Bank's World Development Report and the annual United Nations’ World Investment Report.

  5. There were seven industries: biotech products, chemical, food, forest products, industrial and farm, office equipment, and pharmaceuticals.

  6. The precondition for a mediating effect to hold is that the independent variable is significantly correlated with the mediator variable. The result shows that intra-regional diversification has a positive effect on LCF (β=0.0896, p<0.05).

  7. Inter-regional diversification is found to be positively correlated with LRF (β=0.1077, p<0.01).

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Acknowledgements

This study is supported by the International Opportunities Fund of the Social Sciences and Humanities Research Council of Canada. The authors thank Professor Ulf Andersson and three anonymous referees for their insightful and constructive comments.

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Authors and Affiliations

  1. Department of Management, Faculty of Business Administration, The Chinese University of Hong Kong,

    Gongming Qian

  2. York University, Toronto, Ontario, Canada

    Lee Li

  3. Henley Business School, University of Reading, UK

    Alan M Rugman

Authors
  1. Gongming Qian
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  2. Lee Li
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  3. Alan M Rugman
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Corresponding author

Correspondence to Gongming Qian.

Additional information

Accepted by Ulf Andersson, Area Editor, 7 April 2013. This paper has been with the authors for three revisions.

APPENDIX

APPENDIX

Table A1

Table A1 Constructs and indicators
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Qian, G., Li, L. & Rugman, A. Liability of country foreignness and liability of regional foreignness: Their effects on geographic diversification and firm performance. J Int Bus Stud 44, 635–647 (2013). https://doi.org/10.1057/jibs.2013.21

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