Why the Home Region Matters: Location and Regional Multinationals
| Published date | 01 December 2013 |
| Date | 01 December 2013 |
| DOI | http://doi.org/10.1111/j.1467-8551.2012.00817.x |
| Author | Chang Hoon Oh,Alan M. Rugman |
Why the Home Region Matters: Location
and Regional Multinationals
Alan M. Rugman and Chang Hoon Oh1
Henley Business School, University of Reading, Henley-on-Thames RG9 3AU, UK, and 1Beedie School of
Business, Simon Fraser University, 8888 University Drive, Burnaby, British Colombia V6G 1J3, Canada
Corresponding author email: coh@brocku.ca
Much of the literature in international business analysing the multinational enterprise
uses the country as the relevant environmental parameter. This paper presents both
theoretical and empirical evidence to demonstrate that country-level analysis now needs
to be augmented by analysis at the ‘regional’ level of the broad triad markets of Europe,
North America and the Asia Pacific. The great majority of the world’s 500 largest firms
concentrate their activities within their home region of the triad. This study uses variance
component analysis and finds that this home region effect outperforms the country effect.
Together, the regional and industry effects explain most of the geographic expansion of
multinational enterprises (MNEs), whereas country, firm and year effects are very
minor. The new data and variance component analysis on the activities of large MNEs
reported here suggest that new thinking is required about the importance of large regions
of the triad as the relevant unit of analysis for business strategy to supplement the
conventional focus on the country.
Introduction
The literature in international business essent-
ially looks at the nexus between firms and coun-
tries. The definition of international business is
that firms operate across national borders. For
example, a multinational enterprise (MNE) is
traditionally defined as a firm with operations in
different countries. The leading theoretical frame-
work in the field of international business is John
Dunning’s eclectic paradigm (Dunning, 1981,
1988, 1992, 1993, 1997). Three concepts are funda-
mental in the eclectic framework: ownership (O);
location (L); and internalization (I). The focus of
this paper is upon L; we ask to what extent the
country is the relevant unit of analysis compared
with the broad region of the triad of Europe, North
America and Asia Pacific. We use the concept of
the broad triad region (Rugman, 2005), which is an
extension of the core triad (the US, Western
Europe and Japan) presented by Ohmae (1985).
The broad triad is Europe, North America and
Asia Pacific. The broad triad is a general concept of
the agglomeration of attractive, proximate foreign
markets including geographic, economic, institu-
tional, cultural and administrative characteristics
(Rugman and Verbeke, 2004, p. 5). Revision to
accounting standards now requires that firms
report sales and assets according to the broad
geographic region corresponding to the broad
triad definition.
In order to focus upon L, we need to be able to
address the interaction of L with O and I. To do
so, we build upon Rugman (2010), who demon-
strates that O and I may usefully be combined as
aspects of firm-specific advantages (FSAs). Essen-
tially, an MNE needs to retain proprietary control
of an FSA by ownership (O) in its process of
internalization (I). In contrast, the L concept cap-
tures country-specific advantages (CSAs). Thus
The authors acknowledge helpful comments from the
associate editor Veronique Ambrosini and four anony-
mous reviewers. Financial support to the second author
for this project was partially provided by a Standard
Research Grant of the Social Science and Humanities
Research Council of Canada (File #: 410-2010-1589).
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British Journal of Management, Vol. 24, 463–479 (2013)
DOI: 10.1111/j.1467-8551.2012.00817.x
© 2012 The Author(s)
British Journal of Management © 2012 British Academy of Management. Published by John Wiley & Sons Ltd,
9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA, 02148, USA.
Dunning’s OLI framework can be reconciled with
the basic FSA/CSA matrix of international busi-
ness theory (Rugman and Collinson, 2009). Using
this theoretical framework, this paper can focus
upon the L, i.e. CSA aspects of international busi-
ness. We present empirical research which dem-
onstrates that the unit of analysis can be the
region rather than the country. In other words,
FSAs can be developed and exploited by MNEs
across regions rather than countries. We do not
focus upon sub-components of FSAs and the
related literature on the resource-based view.
Instead, we align this thinking, in the tradition of
Dunning, to the location variable and extend it to
transaction cost economics and institutional theo-
ries. As Dunning indicated, it is the interaction
between O, L and I that matters. We recognize
this and are careful to examine the extent to which
FSAs are affected by a regional focus, rather than
the traditional country focus.
The advantage of using the FSA/CSA matrix is
that it is a framework for analysing the interac-
tions between managerially driven capabilities
that determine FSAs and largely exogenous
country factors spanning the political (govern-
ment regulatory activities), cultural, economic
and institutional dimensions (Rugman, 1981,
2009). In terms of FSAs, it has been demonstrated
that these are theoretically aligned to the domi-
nant logic of the resource-based view in strategic
management (Rugman and Verbeke, 1992, 2003).
The nature and extent of FSAs has been analysed
at country level in the international strategic man-
agement literature. There is no need to modify,
adapt or reinvent this work when we consider the
region as the unit of analysis. In other words,
FSAs apply at either country or regional level.
However, the CSA axis is the one which needs
to be rethought when region confronts country as
the unit of analysis. The broad regions of the triad
may well merit new and different analysis across
their political, cultural, economic and institu-
tional spaces. It is not possible in this paper to
explore these dimensions in detail. Instead, we
follow an empirical approach, testing the extent to
which the world’s 500 largest firms operate at a
regional rather than country level. In particular,
we construct variance component estimates for
the first time on this topic. These test the extent to
which the region explains variance more than
country effects. The next two sections review loca-
tion strategy in international business and briefly
extend the recent literature on the regional effect
and its measurement to explain why the home
region is important in multinational activities. We
then discuss relevant metrics and present new data
on them. We conclude with a variance component
analysis and discuss its findings and limitation.
Location in international
business theory
In the field of international business much of the
theoretical and empirical research to date has
used the country as the relevant unit of analysis.
The basic theoretical work examining firm-level
strategy and the choice of entry mode argues that
the firm goes abroad in a sequential process. This
work, popularly known as the Uppsala School
(Johanson and Vahlne, 1977), regards interna-
tional business as inherently more risky than
domestic business. Consequently, firms expand
abroad in a cautious manner. Initially, they
spread their activities into neighbouring geo-
graphic countries. For example, a Swedish firm
will expand into other countries in Scandinavia,
then go into continental Europe, then to the UK,
and finally to North America and Asia. This
process of incremental and gradual expansion
permits the firm to gain knowledge about foreign
markets, and such learning is facilitated through
sequential expansion to more and more risky
foreign markets. Later, the Uppsala School of
thinking is linked with the evolutionary perspec-
tive on market entry and the ownership decision
(Kogut and Singh, 1988; Mutinelli and Piscitello,
1998). It is noteworthy that the Uppsala School
regards risk to be increasing as distance from the
home base increases.
Before the Uppsala School’s work, Vernon
(1971, pp. 62–63) also noted a ‘gradual fanning
out from geographically and culturally familiar to
the geographically and culturally remote area of
the world’ for US manufacturing firms. In more
elaborate extensions of this basic model, it has
been shown that the costs of international expan-
sion increase with distance (Erramilli, 1991;
Grosse and Trevino, 1996; Ragozzino, 2009). This
appears to be consistent across economic, politi-
cal, cultural and other dimensions (Berry, Guillén
and Zhou, 2010). Recently, Johanson and Vahlne
(2009) revised their original internationalization
process thinking as a result of subsequent changes
464 A. M. Rugman and C. H. Oh
© 2012 The Author(s)
British Journal of Management © 2012 British Academy of Management.
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