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How much does home country matter to corporate profitability?

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Abstract

This paper provides researchers in the fields of international business and strategic management with information on the relative importance of home-country, industry, and firm influences on corporate profitability for firms with varying degrees of multinationality. The analysis relies principally on the Compustat Global reports for 1993–2003. The findings demonstrate that home-country and industry effects are more important to domestic firms than to multinationals. However, home-country influences are important even for firms with high degrees of multinationality. The evidence suggests that multinationals profit from industry-grounded opportunities to distribute activities across the countries in which they operate, but there are tradeoffs associated with internationalization. Multinationals may suffer from less protection afforded by the home-country environment and greater industry-level competition, but gain a broader scope for deploying idiosyncratic, firm-specific advantages through mechanisms enhanced by home-country experience. We conclude that industry effects in single-country studies should be interpreted carefully as influenced by the home countries of the multinational firms that are under study.

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Notes

  1. This assumption may be crude in some instances, such as for firms headquartered in countries known to be tax havens, and thus we test for the robustness of our findings as a result.

  2. In the main sample we study 1562 firms headquartered in 15 countries between 1993 and 2002. In an “extended sample” we examine 1906 firms headquartered in 15 countries between 1993 and 2003: in this sample we have insufficient information to estimate directly the importance of firm effects, although we can obtain unbiased estimates of the importance of home-country, industry, and other effects. The purpose of this sample is to explore how our results are affected by the inclusion of all of the firms for which we have information on multinationality. Third, in a “complete sample” we study 4551 firms headquartered in 43 countries between 1993 and 2003. For the analysis of this sample we cannot assess either the degree of firm multinationality or, directly, firm fixed effects. The analysis affirms that the relative importances of home country and industry are not driven by the smaller number of countries and industries in the prior two samples.

  3. Home-country advantages may also be perpetuated as domestic companies benefit from institutional developments that flow back through MNEs into the home-country environment, such as occurred after Nokia's international successes led to extensive investments in the communications infrastructure in Finland that benefitted other companies headquartered in Finland.

  4. Errors associated with this assumption are likely to dilute home-country effects in the empirical analysis, and thus bias against the finding that home-country effects are important. Nonetheless, we test for the robustness to this assumption in two ways: first, in a supplementary analysis that excludes firms headquartered in the “tax haven” countries of Bermuda, the Cayman Islands and Hong Kong; and, second, by evaluating the importance of home-country effects separately for domestic-only firms and MNEs.

  5. In an additional test we complemented the main results for European firms, which rely on the Directory of Corporate Affiliates, with results that rely on the Amadeus data set to assess the degree of firm multinationality.

  6. This exclusion was implemented by McGahan and Porter (1997) to ensure that the results are not affected by temporary entities that were established for the dispensation of assets and other transient phenomena. The main results are robust to the inclusion of these firms.

  7. Rajan and Zingales (1995) note that small firms may be particularly prevalent in developing countries, which, unfortunately, are not well represented in our data set. Nonetheless, to ensure that our results are not biased by the exclusion of these very small firms, we reintroduced them into the data set and replicated our analysis. While total variance increased (thereby depressing the explanatory power of all types of effects), the headquarters country, industry, and country–industry effects all were significant. Country–industry interactions were even more significant relative to country and industry effects than in the main analysis.

  8. Amadeus provides an alternative mechanism for assessing the degree of multinationality, as it contains information on the number of subsidiaries of firms headquartered in the countries of Europe. For the analysis using Amadeus (accessed 18 October 2007) we performed a similar matching procedure for the firms in the Compustat global data set as used to obtain our “complete” sample. We were able to match 42% of the total of 9667 records in the Compustat data set for Europe with Amadeus firms. Of these, 84% were records of firms (identified as “ultimate parents” in Amadeus) that reported on more than one subsidiary. The average number of subsidiaries for matched firms that had subsidiaries was 19.

  9. Because our dependent variable is based on accounting reports, it is possible that differences in accounting policy in part explain our results. Accounting rule differences could contribute to our findings, particularly if accounting rules across industries vary systematically by country. For example, suppose that every country in the world employs a restriction that prevents pharmaceutical companies from capitalizing R&D. This policy would then generate a worldwide industry effect for pharmaceuticals. Suppose alternatively that Finland requires all companies to expense stock options but the US does not. Then we might expect to see differential country effects for Finland the US, all else equal. Accounting-rule differences generate country–industry effects only if an accounting policy is uniquely targeted by a particular country at a specific industry. For example, country–industry effects for Finland in pharmaceuticals would arise if Finland allowed pharmaceutical companies to recognize future revenue from the sale of “annuity drugs”, and if this policy was not adopted by other countries. To ensure that accounting results are not driving our main results, we replicate them in a sample that includes only manufacturers, for which accounting anomalies are thought to be low (Raynor, 1999).

  10. We also conducted sensitivity analyses on the expanded and complete samples to ensure that the conclusions of the study were not influenced by the reduced reporting for 2003. While goodness-of-fit dropped on some measures, the results were not affected measurably, and the conclusions were robust.

  11. In the complete sample the countries hosting the best-performing firms are Greece, Turkey, and South Africa. Those with the lowest-performing firms are Luxembourg, Argentina, and the Cayman Islands.

  12. Our main analysis of the complete sample excludes firms from Namibia and Mauritius, because these countries hosted only one or two industries. As Panel D of Table 1 indicates, several additional countries (Argentina, Colombia, and Luxembourg) hosted just a few countries and industries. This means that countries such as the US, Japan, and the UK, for which we have information on at least several hundred firms, are compared with countries with performance effects that are dominated by a small number of companies. To ensure that our results are not skewed by the inclusion of the less-populated countries, we replicated our analysis on only those countries for which we had information on more than five industries, and found consistent results.

  13. We conducted this analysis to ensure that the results were not affected by accounting anomalies associated with either tax advantages or the recent wave of corporate relocations for financial or regulatory reasons to the United Kingdom and Belgium from other areas of Europe. We also obtained consistent results in models that exclude only Bermuda, the Cayman Islands, and Hong Kong.

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Acknowledgements

We thank the editors, anonymous referees, Juan Alcacer, Nicholas Argyres, Asli Arikan, Richard Caves, Kira Fabrizio, Mercedes Delgado, Jeffrey Furman, Sarah Kaplan, Andrew King, Joanne Oxley, Bennet Zelner and seminar participants at the Atlanta Competitive Advantage Conference, the London Business School, the Royal Complutense Colegio, and the University of Toronto for helpful suggestions, conversations and comments. Special thanks to Juan Alcacer, Richard Caves, Joanne Oxley, and Bennet Zelner for guidance in analysis and the literature. We are grateful for financial support from the University of Toronto and Boston University.

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Accepted by Witold Henisz, Area Editor, 22 May 2009. This paper has been with the authors for five revisions.

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McGahan, A., Victer, R. How much does home country matter to corporate profitability?. J Int Bus Stud 41, 142–165 (2010). https://doi.org/10.1057/jibs.2009.69

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