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NOT ALL COMPETITORS ARE CREATED EQUAL:
THE HETEROGENEITY OF MNE COMPETITORS AND ITS COMPETITIVE CONSEQUENCES
Lilach Nachum
Baruch College, City University New York
55 Lexington Avenue, New York, NY 10010, USA
Marina Carnevale
Fordham University
113 West 60th street, New York, NY 10458, USA
Helaine Korn
Baruch College, City University New York
55 Lexington Avenue, New York, NY 10010, USA
Key words: MNE competitors, competitors’ heterogeneity, MNE competitive position, nationality, location of the competition, legal services
Acknowledgement
We acknowledge with gratitude thoughtful comments of Joel Baum, Mehmet Genc, Michael Hitt, ArturKalnins, Christine Parker, Christos Pitelis, Rajeev Sawant, Prakash Sethi, Carole Silver, the participants at the 2009 Clifford Chance Conference on Professional Services Firms at Harvard Law School, in the 3rd Israeli Strategy Conference, and in seminars at the National University of Singapore and at the Center of Business Research of Cambridge University on earlier drafts of the paper. We extend special gratitude to Mr. Dario de Martino, then at Cravath, and Mr. Lowry, then of the American Lawyer Association, for generously sharing with us their expertise of the industry.
NOT ALL COMPETITORS ARE CREATED EQUAL:
THE HETEROGENEITY OF MNE COMPETITORS AND ITS COMPETITIVE CONSEQUENCES
Abstract.
By virtue of their participation in multiple competitive settings, MNEs confront competitors with different attributes and in different locations. These variations pose different challenges across competitive settings. Building on competition and RBV theories, combined with MNE theory, wehypothesize that the value of MNEs’ assets and the intensity of the competition they face vary in relation to competitorsof different nationalities, geographic scope, and locations. These predictions are tested on US legal-services MNEs in competition with US domestic firms and non-US MNEs in the US and abroad. The variations we find reconcile the puzzling varying competitive positions of MNEsacrosscountries.
The business landscape is scattered with examples of MNEs developing prevailing advantages in a certain country by exploiting their assets and building on them to establish strong competitive position, whereas these same assets are far less potent of a competitive advantage in other countries, leaving the MNE’s position short of its success elsewhere.What do these differences tell about the competitive value of MNE assets and the ways by which they should be deployed? Why does the value of the same asset vary in different countries? And what are the consequences of such variations for the competitive intensity that MNEs confront across different countries?
Strategic management theory suggests that the competitive value of firms’ assets is relative to the competition and can only be understood with explicit reference to the competition (Porter, 1985). The resourcebased view (RBV) of the firm similarly emphasizes the relative aspect of firms’ assets, which have to be rare and superior to those of the competition for them to be sources of competitive advantage (Barney, 1991). The insight of this work, however, has not been fully incorporated in MNE theory.
MNE theory references to the competition have been made primarily in discussions of the decision to invest abroad and the patterns of internationalization (Head, Mayer & Ries, 2002;Gimeno, Hoskisson, Beal & Wan, 2005; Ghemawat & Thomas, 2008; Alcacer, 2012). They are also implicit in research on the liability-of-foreignness (Zaheer, 1995), whereby MNEs’ competitive positions are studied in relation to domestic firms (Nachum, 2010). These studies have made important contributions to the understanding of competitors’ impact on MNEs, but they do not consider it as a factor that determines the value of MNE assets and shapes their competitive position. The theory of MNE assets focuseson internal assets as the prerequisite for foreign investment, and views their value as being determined endogenously,based on the possession of certain capabilities(Hymer, 1960; Caves, 1996). Implicit in this conceptualization is the assumption that these assets are constant and their value does not vary across competitive settings. Discussions of the internalization of the cross-border market for knowledge as the driver of foreign activity (Buckley Casson, 1976), and the theory of monopolistic advantages (Lall, 1980) suggest that these assets are unique to the firms possessing them, but this notion has not been employed in relation to the competition. MNE theory thus provides limited means to explain the competitive dynamics that MNEs confront, and strategic management theory may not be suitable for examination of variations in competitive dynamics across countries.
In this paper we seek to deepen the understanding of competitive dynamics in the context of the MNE. Building on competition and RBV theories(Barney, 1991, 2001; Chen & Miller, 2012), combined with MNE theory (Hymer, 1960; Caves 1996), we develop a theoretical framework whereby competitive value is determined with explicit reference to the competition. We further assume that thecompetitors that MNEs confront are heterogeneous in terms of the assets they possess, and hence the competitive value of MNE assets is context-specific by its very nature and varies across competitive environments (Priem& Butler, 2001; AroraNandkumar, 2012). We maintain that the most important distinguishing features of MNE competitors are nationality, geographic scope (domestic firms or MNEs), and location, and advance hypotheses that anticipate the value of MNE assets andthe intensity of the competition in competition with thesecompetitor-groups and across locations.
Theempirical testing is based on US legal-services MNEs as the focal MNEs in competition with US domestic legal-services firms and non-US legal services MNEs in the US and abroad, observed over a five-year period (2004 through 2008). We find support for the anticipated variations of the competitive value of MNE assets and the intensity of the competitionin competition with different competitor-groups and in different locations. Of the three distinguishing attributes of the competition, the location of the competitive engagement exercises the strongest impact on competitive value and on the intensity of the competition, whereas competitors’ nationality and their geographic scope are of limited importance.
The study makes several important contributions to MNE theory. For one, studying the competition as the factor that determines the competitive value of MNE assets is an important contribution to a research tradition that,with its focus on the role of such assets in explaining the existence of the MNE (Hymer, 1960; Caves, 1996) and the strategic challenges they confront (Bartlett Ghoshal, 1989), has paid limited attention to the competition. The recent interest in MNE inter-organizational relationships (Contractor Lorange, 2002; Beamish, 2008) has further marginalized research interest in the competition. This inhibits the ability to apprehend the range of relationships among firms.Further, by virtue of their operations in multiple competitive settings, MNEs confront competitors with varying characteristics, which pose different competitive challenges. The oligopolistic structure of the industries in which MNEs compete (Caves, 1996) makes the competition particularly detrimental in shaping MNEs’ competitive position. Disregard to the competition inhibits the ability to comprehend the determinants of MNE competitive position.
Further, by drawing attention to competitors’ heterogeneityand explicitly accounting for its impact on competitive dynamics, our study introduces a notion of MNE assets that varyacross competitive settings, and presents the variations in MNE competitive positions across countries as an intrinsic attribute of international competition. This contribution is particularly important in the contemporary business environment, where the competitors that MNEs confront have become more heterogeneous than ever before. It also extends the range of competitors considered in MNE theory beyond the traditional focus on domestic firms as the pertinent competition (Hymer, 1960). Notably, it throws light on other MNEs, which in many competitive settings are the most significant competitors ofMNEs.
The focus on legal-services MNEs is another noteworthy contribution of the study. This industry is important by itself and as representative of professional-services industries. According to a recent McKinsey study, these industries are the largest contributors to the budget surplus in mature economies (McKinsey Global Institute, 2012). Deepening the understanding of these industries is thus a contribution of notable merit.
The study makes important contributions also for practice. The neglect of the competition could result in strategic moves that differ from those that would have been undertaken had the competition been explicitly taken into consideration. It could lead MNEs to select actions that maximize their performance in the absence of competition, but not necessarily in its presence (Simonsohn, 2010). The variations we illustrate in the competitive dynamics across different competitors call for different strategic responses, and provide MNEs a basis for differentiating themselves in relation to different competitor-groups.
THEORY AND HYPOTHESES
Competition theory attributes the heterogeneity of the competitors that firms faceto them belonging to different strategic groups (Mas-Ruiz& Ruiz-Moreno, 2011), competing in varying product and resource markets (Chen & Miller, 2012), or operating in different locations(Fuentelsaz & Gomez, 2006). Research in this tradition shows that competitor-groups share common attributes that distinguish them from other groups, and as a result of this heterogeneity, theypose different competitive challenges, such that the competitive dynamics across competitor-groups vary.
Extending this notion to the context of the MNE, we suggest that the most important distinguishing features of competitorsare nationality, geographic scope, and location.These three attributes form the defining characteristics of the MNE, and hence exercise the most significant impact on the competitive value of MNE assets and the resulting competitive dynamics. Nationality is impactful because international competition brings together firms of different nationalities whose assets are shaped, at least in part, by the resources of their home-countries(Porter, 1990), givingrise to asset-variations across competitors of different nationalities (Makino, Isobe & Chan, 2004; Fabrizio & Thomas, 2012). Shared nationality is also likely to lead firms to expand abroad in tandem (Head et al., 2002), resulting in market similarity among them (Chen & Miller, 2012). The international expansion of firms often evolves in a predictable mannerbased on the geographic, cultural, and psychic distance from their home countries.
Geographic scope sets MNEs apart from domestic firms and establishes their distinctiveness. MNEs are assumed to havetechnology, advertising,and managerial skills that are superior to those of domestic firms (Hymer, 1960). These differences are further accentuated by international activity, which affordsMNEs access to resources worldwide and the flexibility to mobilize resources across countries (KogutKulatilaka, 1994). It also enables MNEs to grow large and enjoy strong market power and economies of scale and scope (Caves, 1996), further differentiating them from domestic firms.
Activity in multiple locations is the distinguishing characteristic of MNE activity. Location shapes the vigor of MNE assets (Barney, 2001), and, as a result, the same competitor poses different competitive challenges in different locations. Further, the competitive behavior of firms varies across locations, in line with the position that locations occupy in their identity (LivengoodReger, 2010), accentuating differences in competitive dynamics across locations.
Competitors’ heterogeneity in terms of nationality, geographic scope and location entails that the value of MNE assets varies in competition with different competitor-groups. This variation finds its theoretical underpinning in RBV theory, whereby the environment external to firms is viewed as exercising major impact on the competitive value of their resources (Barney, 1991, 2001; Priem & Butler, 2001), such that the sources of their competitive advantages vary across different environments (Miller & Shamsie, 1996; AroraNandkumar, 2012). The focus of this tradition has been on product- and factor-markets as the environmental attributes that introduce this variation. Building on competition theory (Chen & Miller, 2012), we extend this idea and bring the competition as an additional environmental attribute that introduces variations in the value of firms’ assets across environments.We maintain that different assets, or the same ones to different degrees, are of value in competition with competitor-groups that vary by nationality, geographic scope and location. In what follows, we advance hypotheses that outline the anticipated direction of this variation.
The Competitive Value of MNE Assets in Competition with Different Competitor-groups
MNEspossess three types of assets: firm-specific assets, originating in the proprietary possession of intangible capabilities that are mobile within firms across countries (Hymer, 1960; Bloom, SadunReenen, 2012), multinationality assets, which derive from the ability to access resources and knowledge in different countries and the flexibility that activity in multiple countries affords (KogutKulatilaka, 1994),and home-based assets that are based on the privileged access that firms enjoy to their home-countryresources (Porter, 1990).
The three types of assets are interconnected but yet distinct, and exercise independent impact on MNEs’ competitive performance. The distinction we make between firm-specific and home-based assets is akin to the RBVdistinction between resources (home-based) and capabilities (firm-specific) (AmitSchoemaker, 1993). The former are tradable and non-specific to the firm, whereas the latter are firm-specific and employed to engage resources within the firm (Barney, 2001;Adegbesan, 2009).While all firms have access to their home-country resources, they vary in their ability to utilize these resources, in line with their firm-specific capabilities. Governments on their part introduce additional differences by granting some firms access to resources that is deprived of others. The multinationality assets and firm-specific assets differ in terms of the geographic scope that give them rise. The firm-specific assetsare derived from capabilities that are not related to international activity (Hymer, 1960; Caves, 1996), whereas the multinationality assets originate in international activity itself, and firms’ ability to exploit similaritiesand differences across countries (Bartlett Ghoshal, 1989; Gupta,Govindarajan Roche,2001). Lastly, the multinationality and home-based assets share some affinity, in that home-country affects the nature of international expansion, and shapes firms’ internationalization paths, but they vary in the type of assets associated with them.
The hypotheses we develop below outline how the competitive value of the three MNE assets variesin relation to different competitor-groups. They are underlain by the notion that competitive value is determined by assets’ distinctiveness relative to the competition (Porter, 1985; Barney, 1991). Shared assets are of limited value because they do not differentiate an MNE from the competition, but could become potent competitive advantages in competition with competitors that lack such assets or cannot access them on similar terms.
Firms of the same nationality tend to develop similar types of firm-specific assets, based on the characteristics of their home environment and in response to the demand of their home consumers (Porter, 1990). Substantial research shows that firm-specific assetsvary systematically across MNEs of different nationalities in a manner that reflects the characteristics of their home environment (Wan &Hoskisson, 2003; Makino, Isobe Chan, 2004). Hence, the value of firm-specific assets is weak in competition with competitors of the same nationality that similarly can access them, but it is most compelling in competition with MNEs of different nationalitiesthat do not share similar assets (Fabriozio & Thomas, 2012).
Further, the privileged access of firms to their home-country assets distinguishes the home-based assets of firms of different nationalities and makes them potent sources of competitive advantage in competition with MNEs of other nationalities. Foreign MNEs are not as able to connect with local resources and mobilize them, nor can they interpret local demand and respond to it as effectively as local MNEs can(Dahl & Sorenson, 2012; Fabrizio & Thomas, 2012).Assets based on home-country resources thus give MNEs advantage over firms of other nationalities. The multinationality assets are of limited value in competition with MNEs of different nationalities because in competition among MNEs, all the participants are assumed to have them. Formally:
H1: MNEs’competitive performance relative to competitors of nationalitiesother than their own is positively determinedby firm-specific and home-basedassets.
The geographic scope of competitors is also expected to introduce variations in the competitive value of MNE assets. The multinationality assets, which MNEs possess by virtue of their international activity, provide them competitive advantages in competition with domestic firms. The narrow geographic scope of the latter inhibits their access to the multinationality assets, awarding these assets distinctive value in competition with these firms. The firm-specific assets are also likely to be sources of powerful competitive advantages in competition with domestic firms because the firm-specific assets of MNEs are assumed to be stronger than those of domestic firms (Hymer, 1960; Caves, 1996). When the competition is studied between domestic firms and MNEs of the same nationality, as we do here, the home-based assets are unlikely to be of competitive significance because firms of the same nationality are assumed to enjoy similar access to these assets. Formally:
H2: MNEs’competitive performance relative to domestic firms is positively determined by multinationality and firm-specific assets.
Locationaffects the competitive value of MNE assets, and hence different assets are of value in competition (with the same competitors) in different locations. Support for anticipating such variation is provided by the notion that firms’ assets are shaped in an interaction with their external environment such that they are often context-specific (Johns, 2006) and change their value across different locations. RBV theory is explicit in articulating such variations, as originating in the interaction between firms’ assets and environmental resources (Barney, 2001;Priem Butler, 2001), and suggests that as a result, advantages vary in different environments (Miller Shamsie, 1996;AroraNandkumar, 2012).
Such variations are expected across locations in general, but we confine our scope to the distinction between home and abroad, and suggest that the competitive value of the home-based assets is likely to be more significant at home than abroad. These assets are often built based on country resources and in response to the characteristics of local demand (Fabrizio & Thomas, 2012). Many of these are immobile and may lose their value in other competitive settings (Liker, Fruin & Adler, 1999; Maitland & Sammartino, 2012). Hence, these assets are effective sources of competitive advantages in competition at home, but may be of limited competitive value abroad. Firm-specific assets are likely to be powerful sources of competitive advantages both at home and abroad.MNE theory is explicit in relation to the critical role of these assets in enabling MNEs to operate in foreign markets. MNEs are assumed to employ these assets in multiple locations and use them to overcome the additional costs of foreign operations (Hymer, 1960; Zaheer, 1995). The multinationality assets are unlikely to be valuable in such competitions because all the participants are MNEs. Formally: