Are companies with a strong domestic network more likely to internationalise? Not necessarily, according to a new study.
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A commonly held view has been that domestic networks facilitate the internationalisation of firms. Strong domestic networks help companies develop core resources and getting to complementary resources. Importantly, they also improve a company’s access to information about new business opportunities.
The better your position is, the better the information you get should be.
Based on these principles, we have assumed that companies with a strong domestic network are more likely to make foreign direct investments (FDI), aimed at strategic managerial control over business activities in a foreign country.
While FDIs are long-term oriented by definition, companies nevertheless often decide to exit them; they make foreign divestments. These divestments happen when firms sell off their ownership of a unit abroad, or simply close it down. One reason why such exits may happen is that the foreign market activity did not achieve the expected results.
My colleague Viacheslav Iurkov (Grenoble École de Management) and I wanted to look at this phenomenon from another perspective.
Do foreign divestments happen because companies see better opportunities for using their resources at home?
In our study, we looked at data from U.S. multinational companies within the electric equipment industry in the period between 2000 and 2008. These firms are known for, among other things, collaborating with each other in various networks, short product life cycles and liberal FDI policies.
We wanted to investigate whether their overall resource deployment strategy were also driven by foreign versus domestic trade-offs.
What we found supported our hypothesis that improved access to information about business opportunities through firms’ home country network actually influenced them to make foreign divestment decisions.
In other words, the more they knew about business opportunities at home, the more likely they were to close up shop abroad ‒ and divert resources back to their domestic market.
Our study also gives some pointers to why this happens.
Why ignore a great opportunity?
Foreign divestment is driven by various factors, some of which are internal to the company in question, such as challenges in managing a foreign unit or a change in strategic focus. Others are external, for example weaker demand or higher costs in foreign markets.
We found that when there was a positive change in a company’s position in their domestic network, it did not only improve their access to information about new business ventures, but it could also lead to businesses reconsidering how their activities are organised and resources allocated across locations.
Put differently, when you receive great information about a new business opportunity at home, the argument for not divesting your foreign investments becomes weaker. Who knows when the next great opportunity will come by?
A critical trigger
Although foreign activities may provide access to new markets and resources, they are still time- and resource-consuming. It is simply just cheaper to pursue opportunities at home, rather than abroad.
Hence, information about new business opportunities in companies’ home countries can be a critical trigger of their subsequent decisions to divest foreign operations. Liquidity concerns and the potential for higher returns due to domestic market uncertainty may create additional incentives for the firms to redeploy their resources.
Our study demonstrates that promoting and assisting the formation of domestic networks can result in an increased “home country” bias. However, in the long run, this strategy could help improve firms’ competitiveness, which is key to survive in any market with global competition.
Foreign divestment decisions are not just isolated events, but part of companies’ broader strategy to grow, and to retain or regain competitiveness.
The popular notion that networks at home facilitate international expansion, is possibly a fallacy, and at the least a double-edged conception.
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Iurkov, Viacheslav; Benito, Gabriel R G. (2018). Change in domestic network centrality, uncertainty, and the foreign divestment decisions of firms. Journal of International Business Studies 2018.
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