In progress Home Country Conditions for International Investment

ERIM PhD 2013 RSM S&E 06 PH_AS


Much of the literature that studies the influence of institutional environments on firms’ internationalisation strategies focuses either on home-host country differences or the extent to which the host country’s environment influences MNE (multinational enterprise) strategy in this market. The importance of the home country environment for international expansion has typically been overlooked. Yet, in many industries performing well in a challenging home market is considered a strategically important objective and potentially a source of international competitive advantages. Three projects will build on this existing body of work and explore in which way the home environment affects decisions to add distance, portfolio restructuring activities and outward investment behaviour of emerging market MNEs; areas that have, until now, received little attention.

The first project enriches extant internationalisation research by studying the effects of home market importance on the cultural distance added by firms during expansion, as some internationalisation moves are bolder than others. Although counterintuitive, bold internationalisation moves are not always deterred by high levels of home market importance, but are also dependent on whether uncertainty in the home country is endogenous or exogenous. The second project builds on this home market focus, but rather shifts the attention to studying both entry and exit activities of MNEs within the bigger picture of international portfolio restructuring. Although many international business papers refer to MNEs as having a portfolio of subsidiaries, in addition to a portfolio of business lines, only few studies actually consider international expansion and foreign divestment as part of a reorientation strategy employed by firms. The third project will examine in more detail certain home country conditions conducive to outward foreign direct investment. Recent studies highlight the importance of public sector support, especially when emerging market multinationals are considered. These home country measures, such as loans, grants, ministerial engagement and information agencies, are in place in a wide variety of countries. This project aims to better understand what role they play with respect to development effects of emerging market multinationals’ investment by comparing investment policy measures for a multitude of different home countries.


multinational enterprises, foreign direct investment, portfolio restructuring, home country conditions, internationalisation strategies, home government investment policy

Time frame

2013 - 2017


Through accumulated foreign direct investments worth about $20 trillion, firms worldwide nowadays own nearly 900,000 foreign subsidiaries, which generate 10% of the world´s gross domestic product (GDP) (UNCTAD, 2011). Although the establishment of such subsidiaries has increased nations´ global connectedness, widespread claims about globalization´s high magnitude are "globaloney" (Ghemawat, 2011: 20). The main reason why globalization is still limited is the enduring existence of cross-country variation in institutions. Institutions are "the humanly devised constraints that structure political, economic, and social interaction" and have both informal and formal components (North, 1991: 97). The informal or cultural component encompasses citizens´ shared values, cognitions, and communication modes, while the formal or governance component concerns a country´s regulatory quality, political risk, and corruption level, among others (Slangen/Beugelsdijk, 2010; Peng/Wang/Jiang, 2008). Together these components constitute a country´s institutional environment.

Various strategic management studies have examined how institutional environments affect firms´ ex ante investment mode decisions and the ex post performance of the subsidiaries originating from these decisions. These studies have mainly focused their attention on examining the impact of (1) the institutional environment of a subsidiary´s host country and (2) the difference in institutional environments between a firm´s home country and a subsidiary´s host country, the so-called institutional distance (Kostova/Zaheer, 1999).

Studies of the impact of host countries´ institutional environments have often examined how host countries´ political risk, corruption, and overall governance quality levels affect foreign firms´ investment mode decisions, notably the choice between greenfield start-ups and acquisitions and that between joint ventures (JVs) and wholly-owned subsidiaries (WOSs) (e.g., Slangen, 2013; Dikova/Van Witteloostuijn, 2007; Uhlenbruck/Rodriguez/Dow/Eden, 2006; Delios/Henisz, 2000). Studies of the impact of institutional differences between home and host countries have often examined how formal differences in regulatory quality as well as informal differences in culture, cognitions, and language influence the above two investment mode decisions (e.g., Slangen, 2011; Estrin/Baghdasaryan/Meyer, 2009; Slangen/Hennart, 2008a; Xu/Shenkar, 2002). They have also examined how especially cultural differences influence the performance of foreign subsidiaries in general and that of acquired ones and JVs in particular (e.g., Slangen, 2006; Barkema/Vermeulen, 1997; Barkema/Bell/Pennings, 1996).

While these studies generally have found that host-country institutions and institutional differences between home and host countries significantly affect firms´ investment mode decisions and subsequent subsidiary performance, they have failed to explore the role of a firm´s home institutional environment. According to Michael Porter´s (1990) seminal work, the home-country environment - and especially its demandingness - is a key driver of firms´ strategic behavior and international competitiveness. In his words, "national values, culture, economic structures, [formal] institutions, and histories all contribute to competitive success" (1990: 74). Hence a firm´s preferred mode of foreign investment and its foreign subsidiaries´ performance will likely be significantly influenced by specific aspects of the firm´s home institutional environment. The overall aim of this project is to identify these aspects. The main research questions that will be addressed are:
1. How do formal and informal aspects of a firm´s home institutional environment influence its foreign investment mode decisions?
2. How do formal and informal aspects of a firm´s home institutional environment influence its foreign subsidiaries´ performance?

Specific informal aspects whose influence will be explored include the cultural position of home countries and their within-border levels of cultural variation and segregation, respectively. A country´s cultural position refers to its scores on specific cultural dimensions such as those of Hofstede (2001) and the GLOBE study (House/Hanges/Javidan/Dorfman/Gupta, 2004). Although home countries´ cultural positions have been found to influence managerial behavior (Drogendijk/Holm, 2012; Schneider/DeMeyer, 1991), their influence on firms´ investment mode choices has been examined in a very piecemeal fashion (Erramilli, 1996; Kogut/Singh, 1988). Consequently, we do not yet know how the choice by firms between greenfield and acquisition entry is affected by their home countries´ cultural positions on such dimensions as individualism, power distance, masculinity, and long-term orientation. We so far only know that this choice depends on home-country uncertainty avoidance (Kogut/Singh, 1988).

While home-country cultural positions may exert isomorphic pressures on managers and hence condition foreign investment decisions, it is important to realize that countries´ position scores on Hofstede´s and GLOBE´s dimensions represent country averages, since these scores are based on the mean of the responses provided by a country´s surveyed citizens. However, in every country there is variation around the cultural mean (Tung/Verbeke, 2010; Au, 1999), owing to the existence of subcultures, i.e. societal subgroups with distinct norms, values, and communication modes (Lenartowicz/Roth, 2001). Home environments characterized by greater cultural variation are culturally more demanding to operate in, potentially causing firms originating from such environments to have greater cross-cultural skills. Consequently, all else equal, they may have a higher preference for culturally demanding investment modes such as acquisitions and/or have better performing foreign subsidiaries.

Cultural segregation, finally, is defined as the degree to which societal subcultures live separately in spatial terms (Alesina/Zhuravskaya, 2011). It is conceptually different from cultural variation, since two home countries with the same cultural variation level may be characterized by different segregation levels. Countries characterized by higher levels of cultural segregation are culturally less complex, potentially causing firms from such countries to have lower inter-cultural skills. Consequently, all else equal, they may rely more on international JVs with culturally knowledgeable local partners and/or perform less well abroad.

Besides informal aspects of the home institutional environment, formal ones may also increase environmental demandingness and thereby influence firms´ foreign investment behavior and their subsidiaries´ performance. Specifically, countries characterized by more policy volatility, governmental bureaucracy, or institutional voids are more challenging to operate in (Peng/Wang/Jiang, 2008; Henisz, 2000), causing firms from such countries to be more used to dynamism and uncertainty. Consequently, all else equal, they may be more inclined to opt for managerially demanding investment modes such as acquisitions (cf. Kogut/Singh, 1988).

Supervisory Team

Pursey Heugens
Professor of Organization Theory, Development, and Change, Scientific Director ERIM, Dean of Research RSM
  • Promotor
Arjen Slangen
Arjen Slangen
Associate Professor in International Business
  • Copromotor
  • Daily Supervisor