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Does the home country effect matter for firm performance? (revised version of 2001/44/SM)

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The globalization process has created considerable speculation on the impact of the home country environment to a firm’s competitive advantage in international markets. The evidence in international economics suggests that national borders matter, while international business often argues that firms’ focus should be global when it comes to customers, capabilities and competition. Using a random effects model that is partly induced from the concept of comparative advantage and partly following the descriptive modeling of performance determinants, this paper explores the quantitative impact of home country environment on the performance for firms across six countries. The paper uses two value based, i.e. risk adjusted and cash-flow based, measures of firm performance, one that measures operating performance and another, market performance. The authors examine the home country effect in two ways. Firstly, they test the country effect in an indirect way by estimating the relative importance of industry and firm factors across countries. Secondly, they test specifically for the presence of country effects, in addition to other external influences, on performance. The results indicate that the importance of country factors is low and firm-specific factors dominate performance across and within countries. The results also show that global industry effects are increasingly more important than country effects. Competitive advantage in a world of increasing market integration then seems to depend primarily on discretionary firm choices, much under management’s control, rather than on the external environment such as country or industry.

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