international business unit V assessment and DQ question

QUESTION 1

Identify the various steps management must take to establish a successful export strategy. Explain the importance of each step in your opinion.

Your response should be at least 400 words in length.

QUESTION 2

Assume that the corporation you work for is having trouble with a partner in a new foreign market. Discuss the various problems of collaborative arrangements that might be occurring. Be sure to explain the impact of each problem that you use.

Your response should be at least 400 words in length.

DQ Question

Describe a couple of products in your household that have been imported. Could a domestically made product have filled the need just as well? Can you describe any services that you use as being imported?

MBA 6601, International Business 1

Course Learning Outcomes for Unit V

Upon completion of this unit, students should be able to:

3. Evaluate policies and factors affecting international trade patterns.

8. Examine the major marketing considerations applicable to international business.

Reading Assignment

In order to access the following resource(s), click the link(s) below:

Baena, V., & Cervino, J. (2014). International franchising decision-making: A model for country choice. Latin

American Business Review, 15(1), 13–43.Retrieved from
https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direc
t=true&db=bth&AN=94873048&site=ehost-live&scope=site

Berrill, J. (2015). Are the world’s largest firms regional or global? Thunderbird International Business Review,

57(2), 87–101. Retrieved from
https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direc
t=true&db=bth&AN=100988041&site=ehost-live&scope=site

Jakada, B. A. (2014). Building global strategic alliances and coalitions for foreign investment opportunities.

International Journal of Global Business, 7(1), 77–94. Retrieved from
https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direc
t=true&db=bth&AN=97543413&site=ehost-live&scope=site

Click here to access the Unit V Presentation. Click here to access a PDF slide view and transcript of the
presentation.

Unit Lesson

Global Strategies

Global strategies begin with the level of participation a business wants. Importing and exporting are the
easiest ways to participate in international business. However, if the business wants to put more “skin in the
game” and can tolerate more risk, then a business looks at product licensing, joint ventures, business
alliances, and foreign direct investment, which increases their commitment and risk substantially.

Companies must first choose to allocate a certain amount of their resources and efforts to international
business. For example, General Electric set an objective of having international sales account for 60% of its
total sales (Glader, 2010). Once a company makes that allocation, resources must be committed, and the
next step is to decide where to proceed.

Country Evaluation and Selection

Many of those decisions will become apparent depending on the type of company. For example, a fast food
company will need multiple locations in one country to have any kind of presence. A manufacturing company
may favor producing in only a few countries and exporting to others. However, for those companies looking to
have placement, the process starts with external scanning.

UNIT V STUDY GUIDE

Global Strategies

https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=94873048&site=ehost-live&scope=site

https://libraryresources.columbiasouthern.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=100988041&site=ehost-live&scope=site

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https://online.columbiasouthern.edu/CSU_Content/Courses/Business/MBA/MBA6601/15L/UnitV/UnitV_Presentation.htm

https://online.columbiasouthern.edu/CSU_Content/Courses/Business/MBA/MBA6601/15L/UnitV_SlideView_Transcript

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Scanning: This is the process by which companies examine many countries broadly and narrow them down
to the most promising prospects. There are 162 countries currently in the World Trade Organization, and
companies might overlook good prospects without first looking very broadly (World Trade Organization
[WTO], n.d.). General characteristics in the scanning process might include many of the economic factors
discussed in Unit II:

 Cultural comparability,

 Gross domestic product (GDP),

 Purchasing power parity (PPP), and

 Human development index (HDI).

Analyzing: This is the process of comparing the feasibility and desirability of each country. For import/export
operations, many of the following variables would not be applicable. However, for advanced collaboration, it is
necessary to consider most of them. Feasibility studies examine not only economic factors in more detail but
also factors of production (especially costs):

 products/services to offer,

 costs of infrastructure and access to energy,

 transportation costs (e.g., railroads, highways, and ports),

 labor costs and availability (e.g., skilled and educated versus unskilled and uneducated),

 technology costs (e.g., labor intensive versus capital intensive),

 geographic location (i.e., proximity to customers),

 government incentives and disincentives (e.g., taxes and corruption),

 time to setup production, and

 estimated product growth.

In addition, indicators directly related to product consumption should be included. For example, disposable
income might be a better economic predictor than GDP. Income brackets might also reveal a hidden middle
class.

The availability of a scarce resource is one reason companies seek placement in foreign countries. In addition
to natural resource availability, companies must include the costs of labor, extraction, transportation, and
taxes into the total cost of resource acquisition.

Risk assessment is the last category to consider when selecting a foreign country to conduct business. There
are three types of risk to consider:

 Political risk is the possibility of damaged and lost assets due to governmental actions or instability in
a country. In this day and time, typical countries with high political risks would be Venezuela or even
Syria.

 Foreign exchange risk is the declining value of an investment due to changes in foreign exchange
rates. For example, our friend John, back in Unit IV, took a risk by buying Chinese yuan with U.S.
dollars. His investment has a negative return so far. Companies do the same thing but on a far larger
scale. They will take millions of dollars, purchase the local currency and build a factory where the
production sells for a profit. If the local currency becomes stronger versus the currency of the home
country, the profits remitted will be less than hoped for.

 Competitive risk is the risk of actual company operations in an environment filled with other real-world
competitors. In many instances, competitors have already captured the availability of scarce
resources, the best workers, the best locations, and customer loyalty. In some cases, foreign firms
buy local companies to overcome those liabilities. Companies with deep pockets can afford to start
anew and build their factories from scratch, but customer loyalty and acceptance takes time to build.

Country Selection

First, scan the countries that might have a broad fit. Second, select the variables that you will use to make the
decision. Third, rank the variables depending on what is important. The ranking will depend on the type of
business. For example, a company making a high-quality product, such as a Rolex, might consider the need
for a skilled and well-educated workforce as an important variable. Opportunities are those places where
expected revenues exceed expected costs. The decision then rests on the evaluation of risks.

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Exports and Imports

Exports and imports are the most common type of international business. In 2014, commodities and products
sold to foreign countries throughout the world totaled in excess of $18.7 trillion, a 1% increase per year for the
last three years. The three largest exporters in the world, China, the U.S., and Germany, in that order,
accounted for 29% of that total (International Trade Centre, n.d.). These statistics understate the true value of
products sold to other nations. Many products, for example, are manufactured components assembled into
bigger products for export.

Exports and imports represent the easiest, lowest cost, and lowest risk way to engage in international
business. Other types of international business, such as product licensing, joint ventures, alliances with other
companies, or foreign direct investment (FDI), take more capital, more risk, and a longer time span to pay off
the investment.

Exporting

An export is a product or service produced in one country and sold to customers or consumers in another
country. The key point here is the product or service earns foreign currency. For example, foreign students in
a university class pay foreign currency to attend classes. The service they are paying for is an export and the
foreign currency they pay goes towards the country’s account balance that compares the net of exports
versus imports.

Exports are beneficial to the United States and domestically based companies. According to Export.gov
(2008), the benefits to exporting could be summed up in a short list:

 If the world’s population exceeds 7 billion, the majority of potential customers reside outside your
national boundaries.

 Free trade agreements abound in all directions—east, west, north and south—and they are being
updated continuously.

 Exporting is like finding more customers who want your product—or a similar product that you can
make to fit their needs.

 The more diverse your customer base is, the better you can weather economic changes in the
domestic market.

For the companies that do export, most begin export operations with customers in countries that share
geographic, cultural, linguistic, political, and legal similarities. For example, Canada and Mexico are the top
two export markets for the United States (International Trade Centre, n.d.). Larger and more experienced
companies employ their own specialists to manage an in-house export business. This is known as direct
exporting. Companies without as much expertise contract with domestic agents. These domestic agents
combine the products from several companies and sell them to other foreign agents to distribute the products.
This is known as indirect exporting. Direct exporting is riskier and requires more commitment than indirect
exporting. However, as a company develops experience with foreign trade, the risk and commitment become
tolerable.

Importing and Exporting: Resources and Assistance

When a company decides to pursue some type of import or export business, there is a need for assistance.
Since foreign countries involve new cultures, legal systems, currencies, tariffs and quotas, and other
administrative regulations, there is some need for specialized knowledge. However, this specialized
knowledge comes from numerous sources. Some of it comes free; some of it is expensive.

Government agencies: In the United States, the government wants private enterprise to export products and
services. Consequently, the government makes a big push to help companies export. The International Trade
Administration within the U.S. Department of Commerce leads a collaborative effort with 19 other U.S.
agencies to assist small and medium businesses (Export.gov, 2008). Things they help with include licenses
and regulations, trade shows, trade partners, international financing, and trade data analysis.

Trade associations: Usually, each type of industry pulls together to fund an association that promotes their
products. Associations like the American Dairy Association and the US Oil & Gas Association are typical

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groups that represent the industry and the companies within that industry. These trade associations are good
sources of information for foreign countries. They provide information such as market demographics, product
demand, advertising and sales consultations, and navigating homeland security programs.

Trade intermediaries: Third party firms that contract out their specialty fall into this category. These
companies usually have agents or contacts in place in different countries that can facilitate your cargo in
either exporting or importing. They provide services such as customs management, legal, accounting, tax
compliance, security, insurance, and trade strategies.

Customs brokers: These are agents on the ground at the point of arrival or departure. They help the
importer navigate the regulations imposed by customs agencies. They manage trade documentation, value
products so they qualify for favorable duty treatment, and defer duties by using bonded warehouses and
foreign trade zones.

Freight forwarders: These are the logistical people. They are important when the cost or timing of freight can
make or break a deal. Their specialty is transportation and storage.

Exporting has the same problems and solutions as importing. Governments prefer exporting because it helps
the current account balance, but there are no obvious blocks to importing. The same skills and the same risks
are at play in either direction.

Foreign Direct Investment

Foreign direct investment (FDI) is a domestic company investing capital money into a foreign country. While
exporting and importing represent reduced risk, FDI represents higher risk because more assets are involved.
There are several reasons why a company would want to do this.

 cheaper manufacturing costs abroad,

 transportation costs are too high,

 domestic capacity is not large enough,

 products need tweaking for the foreign market,

 trade restrictions hinder imports, and

 country of origin is an issue.

There are different variations of FDI. The more ownership a company has, the more control over operating
decisions it has. For example, if a company wants to bring in some proprietary, cutting-edge technology, the
company will want to protect access to this technology. A collaborative arrangement with the foreign company
will not give complete security to this technology because other owners will have access. A company, in this
case, might opt for total ownership to protect their investment.

Wholly owned: A domestic company achieves a wholly owned facility in a foreign country by either building
its own plant according to its explicit needs or by acquiring another company with similar attributes in a
favorable location. Building your own plant infers a clean startup in which you have to hire and train workers,
find vendors, and market and distribute an unknown brand. This type of investment is known as a greenfield
investment. It originally referred to locating a new building on a cow pasture, literally a green field. Acquisition
implies that the workforce is hired, trained, and employed; vendors are already established; and product
distribution is already ongoing.

Collaborative arrangements: Collaborative implies working with other companies to achieve financial and
operational goals. This type of investment does have some advantages such as spreading risk and cost;
gaining access to scarce resources; securing vertical and horizontal integration; and gaining knowledge about
competition. There are multiple variations of how a company can become involved with other companies in
foreign countries.

Licensing: If a company owns a copyright, a patent, a process, a brand, an image, an invention, a
technology, or some other asset that another user would use, then a licensing agreement is awarded to that
foreign company. In 2013, product licensing accounted for $251 billion with The Walt Disney Company being
the world’s largest licensor (Global License, 2015).

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Franchising: In a franchising agreement, the franchisee looks to capitalize on the brand and operating
processes of the franchisor. The franchisor not only allows the brand to be used but also offers assistance on
operating standards, marketing, and advertising. Franchising is a form of licensing but with more involvement
and more control by the franchisor. The top global franchisor in 2015 was McDonald’s, a fast food restaurant
chain (Global License, 2016).

Management contracts: A management contract is a written agreement between the owner of a business
and a third-party management company. A foreign company may pay for managerial assistance when it
believes another company from another country can manage its operation more efficiently. The managing
company receives fees without having to invest capital funds. This type of agreement is found mostly in hotel
companies. Companies such as Marriott, Holiday Inn, and Melia have specialized knowledge about hotel
operations that is hard to emulate. Thus, they contract to bring in their special management abilities.

Turnkey operations: Turnkey operations are essentially large construction projects contracted by
government agencies with outside contractors. Some large contractors have unique specialties, such as
nuclear reactors, bridges, canals, dams, or factories. When the final product is a complete ready-to-operate
facility, the contracting government will arrange its own operations. What sets this category apart is the size of
the project, potentially costing billions of dollars and taking many years to complete.

Joint ventures: Normally referred to as JVs, these arrangements are composed of two or more companies
that form a jointly owned company to achieve joint objectives. When more than two companies participate, the
arrangement is a consortium. Usually, each company that participates brings some unique perspective into
the group for achieving its objectives. Well-known joint ventures include General Motor Corporation’s
collaboration with automobile companies in China.

Equity alliances: This is a collaborative agreement in which at least one partner takes an equity position in
the other company. The purpose of the equity ownership is to solidify a collaborating contract so that it is
more difficult to break. For example, the Port of Antwerp (Belgium) took a minority position in Essar Ports
(India) when the two signed a long-term alliance to improve quality and productivity (Essar, 2012).

If one does an Internet search for “export plan,” there are numerous export business plans that will come up.
Most of the plans involve specific details; however, the presentation found in at the end of this unit will help
explain that information.

Problems and Success with Collaborative Arrangements

Collaborative agreements usually work until they do not. Just like any partnership, it is easier and more fun to
get into one than it is to get out of one. While alliances bring together companies with complementary skills,
those companies do not necessarily have the same values or objectives. Some studies indicate alliances only
have a 50/50 chance of succeeding (Bamford, Ernst, & Fubini, 2004). Thus, it is important to know and
understand what causes problems and how to avoid them.

First, we must establish what causes divorce. There are five factors that account for the majority of strained
relations inside the collaborative arrangement (Daniels, Radebaugh, & Sullivan, 2015):

 Relative importance to partners: Those companies with active involvement will resent those partners
with passive involvement. The size of the partners also contributes to the relative importance of the
deal. A small partner may need this arrangement to work more than the large partner, who can afford
several other joint ventures.

 Divergent objectives: Usually, the alliance is established with stated goals or objectives. It is possible
that over time, circumstances change, and the needs of a company change. One company may want
dividends from the joint venture, whereas another company may want to push research and
development with earnings.

 Questions of control: Inside the alliance, sharing assets, processes, or brand names without
accountability can cause harm to one of the partners if it incurs product failure. When a joint venture
uses a high-quality brand to market substandard products, the company that provides the brand
receives a damaged reputation.

 Comparative contributions and appropriations: One company that contributes little to the outcome
versus other companies that contribute more will cause resentment and ill will. Partners that

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contribute little but take away more intangibles (product knowledge or market knowledge) will cause
considerable stress.

 Culture clashes: Differences in country cultures and differences in company culture can account for
some stress.

So what increases the odds of a collaborative arrangement being successful? These three factors are helpful
(National Institute of Standards and Technology, 2001):

 Prior collaborative relationships: Companies that have worked with other companies before will be
better partners in a collaborative arrangement.

 Vertical integration projects: Projects in which one company is working with another company, up or
down the product line, seems to be more successful. These companies could have a vendor’s
relationship and still be successful. Projects along horizontal lines (direct competitors) do not work out
so well.

 Personnel stability: Joint ventures have a tendency to last a few years, and they need management
stability. Management that negotiated the original objectives will more than likely keep the project on
track. Often, companies will turn the project over to the more experienced company in order to learn
the ropes. New managers will use the project as a stepping-stone as they promote in the
organization. Frequent management turnover is not a successful trait and causes the partnership to
unravel.

Collaborative agreements are like marriages. The reasons to tie the knot may sour over time, and it becomes
very painful and very expensive to untie the knot. Many collaborative agreements now have built in prenuptial
agreements that allow dissolution of the agreement if certain objectives are not met within a specified period.
Careful selection of the partner(s) cannot be overstated.

References

Bamford, J., Ernst, D., & Fubini, D. G. (2004). Launching a world-class joint venture. Retrieved from

https://hbr.org/2004/02/launching-a-world-class-joint-venture/

Daniels, J., Radebaugh, L., & Sullivan, D. (2015). International business: Environments & operations (15th

ed.). Upper Saddle River, NJ: Pearson.

Essar. (2012). Essar Ports announces strategic alliance with Port of Antwerp international. Retrieved from

http://www.essar.com/article.aspx?cont_id=qgycq66MFKM=

Export.gov. (2008). Benefits of exporting. Retrieved from http://export.gov/about/eg_main_016807.asp

Franchise Direct. (n.d.). Top 100 global franchises-rankings (2016). Retrieved from

http://www.franchisedirect.com/top100globalfranchises/rankings/

Glader, P. (2010). GE taps veteran Rice to lead global operations. The Wall Street Journal. Retrieved from

http://www.wsj.com/articles/SB10001424052748703514904575602421667466194

Global License. (2015). The top 150 global licensors. Retrieved from http://www.licensemag.com/license-

global/top-150-global-licensors-1?page=0,0

International Trade Centre. (n.d.). International trade statistics 2001-2015. Retrieved from

http://www.intracen.org/itc/market-info-tools/trade-statistics/

National Institute of Standards and Technology. (2001). Determinants of success in atp-funded r&d joint

ventures (NIST GCR 00-803). Retrieved from http://www.atp.nist.gov/eao/gcr_803

World Trade Organization. (n.d.). Understanding the WTO: The organization. Retrieved from

https://www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htm

International Journal of Global Business, 7 (1), 77-94, June 2014 77

Building Global Strategic Alliances and Coalitions for Foreign Investment Opportunities

Dr. Balarabe A. Jakada

Department of Business Administration and Entrepreneurship

Bayero University, Kano, Nigeria.

bajakada@yahoo.com

Abstract

Global strategic alliance and coalition is a diffuse way of effective combination of strengths of

companies aiming at entering new markets, exploring new technologies, bypassing government

entry restrictions and to learn quickly from the leading firm in the partnership, all in an effort to

exploit foreign investment opportunities. Strategic alliances are however, not easy to develop and

support. They often fail because of technical errors made by management of member firms. To

make it a success, a strong and efficient alliance agreement has to be in place to enable companies

to gain in markets that would otherwise be uneconomical. Building alliances requires considerable

time and energy from all parties involved with a detailed plan, expectations, limitations and scopes,

and the likely benefits drivable from the project. Alliances take a number of forms and go by

various labels. Alliances may be contracts, limited partnerships, general partnerships, or corporate

joint ventures, or may take less formal forms, such as a referral network. The paper is aimed at

exploring and educating prospective and allied businesses or firms the need and significance of

across border coalition, and how to go about it. It is a literature based paper and therefore, reviews

related literatures from journal articles, texts, seminar papers and some online sources for better

understanding of the concept. The paper looked into issues in building global strategic alliances

and coalitions, developing a global strategy, why the formation of alliances, issues in selecting

alliances partners, stages involved, and benefits drivable from such partnership. It further

highlights the conceivable types of strategic alliance and sighted examples of real life alliances. It

was found that global alliances had helped big firms explore new international markets and new

technological competencies. Thus the paper recommends that a firm, who really wants to have a

global touch, would have to start through alliances or coalition.

mailto:bajakada@yahoo.com

International Journal of Global Business, 7 (1), 77-94, June 2014 78

Key words: Strategic alliance, Globalization, Strategy, Coalition, Foreign Direct Investment

Introduction

Change is an ever present facet of business development. Businesses transfer ownership, for

example, and end up reformulating their entire business structures. Companies hire outside

consultants to advise restructuring during financial crises. Sometimes the fact that businesses go

global is the product of the inevitable ebb and flow of commerce. An overseas buyer may transfer

operations to the home country. The majority of an industry’s business may shift overseas, making

global expansion all the more desirable. Competition may develop in regions or countries such

that it is unwise for a company not to follow.

Companies go international for a variety of reasons but the typical goal is company growth or

expansion. When a company hires international employees or searches for new markets abroad,

an international strategy can help diversify and expand the business. Economic globalization is the

process during which businesses rapidly expand their markets to include global clients. Such

expansion is possible in part because technological breakthroughs throughout the 20th century

rendered global communication easier. Air travel and email networks mean it is possible to manage

a business from a remote location. Now businesses often have the option of going global, they

assess a range of considerations before beginning such expansion.

During the last half of the twentieth century, many barriers to international trade fell and a wave

of firms began pursuing global strategies to gain a competitive advantage. However, some

industries benefited more from globalization than do others, and some nations have a comparative

advantage over other nations in certain industries when it comes to foreign investments. According

to Hornberger (2011) there are promising trends in global Foreign Direct Investment (FDI) flows

for developing and transition economies”. Each year more and more FDI is flowing not only from

developed into developing economies but also from one developing or transition economy to

another. UNCTAD (2009: 17) notably, since the mid-1980s, most developing countries have

become much more open to FDI, with a view to benefiting from the development contributions

which FDI (particularly high-quality FDI) can generate for host countries. In the same vein,

Todeva & Knoke (2005) highlighted the possibility of both firms and host countries reducing the

business risk of international operation, is by cooperation among firms in the form of alliances and

coalition. In other words, corporations that have aligned their business with others are seen to be

more efficient and effective on the international business scene (Todeva & Knoke, 2005).

With growth and development in sight, developing countries seek to make regulatory work for

FDI more transparent, stable, predictable, secure and thereby more attractive for foreign investors

(LJNCTAD 2003). Again this style of partnership trading should be replaced with strategic

alliances and mergers if developing countries have a chance of developing through the assistance

International Journal of Global Business, 7 (1), 77-94, June 2014 79

of the developed nations in the 21st century (Kinyeki and Mwangi, 2013). This is a critical issue

of economic development for the developing nations.

As this paper integrates three different issues that are pertinent in International Business, each of

them will be closely examined to have a better linkage on their interdependence. Objectively, this

paper seeks to explore every available opportunity in building a global strategic alliance or

coalition in exploring international business opportunities, how multinationals align, why they

align, stages involved and importantly strategize while doing business globally.

The Concept of Globalization and Foreign investment

Globalization is an ongoing process by which regional economies, societies and cultures have

become integrated. The term is used to describe the fact that the world becomes a global village

and that trade, production and finance are being conducted on a globe of scale. Economic

globalization is the process during which businesses rapidly expand their markets to include global

clients. Such expansion is possible in part because technological breakthroughs throughout the

20th century rendered global communication easier. Air travel and email networks mean it is

possible to manage a business from a remote location. Now businesses often have the option of

going global, they assess a range of considerations before beginning such expansion.

Foreign direct investment (FDI) is but an investment made by a company (parent company) into a

foreign company. Making an argument for why foreign direct investment plays an extra ordinary

and growing role in global business. Graham and Spaulding (2005) says “foreign direct investment

in its classic definition, is defined as a company from one country making a physical investment

into building a factory in another country”. They further maintained that “the sea change in trade

and investment policies and regulatory environment globally in the past decade, including the

policy and tariff liberalization, easing of restrictions on foreign investment and acquisition in many

nations, and the deregulation and privatization of many industries, has probably been the most

significant catalyst for FDI’S expanded role in recent time”.

Building a Global Strategy

Today, we live in a global economy in which time taken for people to move between continents

has been significantly reduced. The business response of large business organisations has to

recognise that they now operate in a global market place and to develop appropriate strategies.

Problems associated with global business management have been identified as factors that

negatively impact the performance and productivity of multinational corporations and in turn,

adversely affect regional and national economic growth. And the new global reality that

organizations and their leaders face is a rapidly changing international context. The intercultural

dynamics of increasing globalization demand strategic cultural thinking and a global mindset that

sees beyond national borders and is open to exchanging new ideas. Leaders of all organizations

International Journal of Global Business, 7 (1), 77-94, June 2014 80

find themselves increasingly working in a fluid environment requiring flexible thinking to adapt

quickly to new and different intercultural environments (Dean, 2006).

Organizations are facing increased global competition, economic uncertainties, and changing

markets. Technology is changing the way we conduct business and manage information.

Outsourcing of significant functions within businesses and organizations complicates the

landscape of supplier relations. Suppliers and vendor partners may be located in the same city,

region or country. But they are just as likely to be located halfway around the world, adding new

challenges to business management.

Global strategy is considered to be an act of building a unique and sustainable ways by which

organization create value, a broad formula for how business is going to compete against another

business in the global market. Global strategy leads to a wide variety of business strategies, and a

high level of adaptation to the local business environment. The challenge here is to develop one

single strategy that can be applied throughout the world at the same time maintaining the flexibility

to adapt that strategy to the local business environment when necessary (Yip, 2002). A global

strategy involves a carefully crafted single strategy for the entire network of subsidiaries and

partners, encompassing many countries simultaneously and leveraging synergies across many

countries. The global strategy assumes that the centre should standardize its operations and

products in all the different countries, unless there is a compelling reason for not doing so (Zou

and Cavusgil, 2002). It is therefore important for the centre to offer a significant coordination its

subsidiaries activities ranging from product standardization, responsiveness to local business

environment and competition in the market.

Global Strategic Alliance and Coalition

Strategic alliances developed and propagated as formalized inter-organizational relationships,

particularly among companies in international business systems. These cooperative arrangements

seek to achieve organizational objectives better through collaboration than through competition,

but alliances also generate problems at several levels of analysis (Margarita, 2009). A strategic

alliance is a term used to describe a variety of cooperative agreements between different firms,

such as shared research, formal joint ventures, or minority equity participation (Campbell & Reuer

2001). Strategic alliance can be described as a process wherein participants willingly modify their

basic business practices with a purpose to reduce duplication and waste while facilitating improved

performance (Frankle, Whipple and Frayer, 1996). In simple words, a strategic alliance is

sometimes just referred to as “partnership” that offers businesses a chance to join forces for a

mutually beneficial opportunity and sustained competitive advantage (Yi Wei, 2007).

According to Dean (2006) in an increasingly globalized environment, organizations in different

nations can expand their reach and effectiveness by building global partnerships, transnational

partnerships and international strategic alliances with other organizations. The term global alliance

encompasses all of these. Dean (2006) explained that such arrangements are especially useful

International Journal of Global Business, 7 (1), 77-94, June 2014 81

where organizations are operating in highly fluid environments of increasing informational

complexity and cultural diversity”. Relationships built on mutual respect and trust hold significant

potential benefits, including increased confidence and security, reduced transactional costs and

better information exchange and creative synergies generated by cultural diversity. In the same

vein, the modern form of strategic alliance is becoming increasingly popular and has three

distinguishing characteristics as described by Jagersma (2005); they are usually between firms in

high – industrialized nations; the focus is often on creating new products and technologies rather

than distributing existing ones; they are often only created for short term durations. Technology

exchange is a major objective for many strategic alliances. The reason for this is that technological

innovations are based on interdisciplinary advances and it is difficult for a single firm to possess

the necessary resources or capabilities to conduct its own effective R&D efforts. This is also

supported by shorter product life cycles and the need for many companies to stay competitive

through innovation (Jagersma, 2005). Similarly Kotelnikov (2010) defined it as strategic alliance

where two or more businesses join together for a set period of time. The businesses, usually, are

not in direct competition, but have similar products or services that are directed toward the same

target audience. He also mentioned that, strategic alliances enable business to gain competitive

advantage through access to a partner’s resources, including markets, technologies, capital and

people.

Literally, coalition or alliance can simply mean conjunction or fusion between two or more

different phenomenon to form a unit, in most case for strategic reasons. Hence, partners may

provide the strategic alliance with resources such as product, distribution channels, manufacturing

capability, project funding, capital equipment, knowledge, expertise or intellectual property. In

other words alliance is a cooperation or collaboration which aims for a synergy where each partner

hopes that the benefit from alliance will be greater than those from individual efforts.

While many analysts regard strategic alliances as recent phenomena, inter-organizational linkages

have existed since the origins of the firm as a production unit. Some examples include firm and

entrepreneur ties to credit institutions such as banks; to trade associations such as the early Dutch

Guilds; and to suppliers of raw materials, such as family farms, individual producers, and

craftsmen (Todeva & Knoke, 2005). Meanwhile, the concept of coalitions has undergone differing

applications and meanings within organizational theory. The earliest uses focus on conflicts within

organizations and the presence of multiple goals within the same organization (Simon and March,

1958). They further emphasize that coalitions is between firms but not within organizations.

Another significant period of coalition research centered on James Thompson (1996), where he

coined the term “Dominant coalition”. Thompson (1996) concluded there were certain constraints

on coalition building, mainly the organization’s technology and environment. Thompson theorized

that the more uncertainty in organizations due to technology and environment, the more power

bases that exist. The coalition grows as the uncertainty increases. Thompson (1996) also used the

term, “inner circle” to describe the selected few within an organization whose connections provide

them with influence. Their role in coalition building is often one of leadership, but they seldom act

International Journal of Global Business, 7 (1), 77-94, June 2014 82

alone in achieving goals. Thompson went further to say that. “Their power is enhanced as the

coalition strives to achieve a group goal: thus, the individual and coalition feed off each other”.

Carrying Thompson’s point one step further, interdependency in an organization creates a greater

likelihood for the formation of a coalition or coalitions.

Generally, building alliance or coalition would go a long way in assisting firms (particularly those

in strong alliance) gain more business advantage in their respective dealings over other (especially,

individual organization without ally). Potential coalition members must be persuaded that forming

a coalition would be to their benefit. To do this one needs to demonstrate that your goals are similar

and compatible, that working together will enhance both group’s abilities to reach their goals, and

that the benefits of coalescing will be greater than the costs (Spranger, 2003). The third point can

be demonstrated in either of two ways: incentives can be offered to make the benefits of joining

the coalition high or sanctions can be threatened, making the costs of not joining even higher. For

example, the United States offered a variety of financial aid and political benefits to countries that

joined its coalition against Iraq in 2003; it also threatened negative repercussions for those who

failed to join, and much worse for those who sided with Saddam Hussein. Another method that

can make joining the coalition appealing is to eliminate alternatives to the coalition. Once most of

one’s allies or associates have joined a coalition, it is awkward, perhaps dangerous not to join

oneself. Although people and organizations often prefer non-action to making a risky decision. if

they find themselves choosing between getting on board a growing coalition or being left behind,

getting on board is often more attractive.

Why form Global Alliance or Coalition

Many fast-growth technology companies use strategic alliances to benefit from more-established

channels of distribution, marketing, or brand reputation of bigger, better-known players. However,

more traditional businesses tend to enter alliances for reasons such as geographic expansion, cost

reduction, manufacturing, and other supply-chain synergies (Kinyeki and Mwangi, 2013). To

further support earlier view, Jacob and Weiss (2008) also maintained that companies forms across

border alliances in order to get instant endorsement that would add to the firm’s credibility thereby

gaining more customers at a lower marketing costs. To combine partner resources to develop new

businesses or reduce investment is a vital reason why businesses form alliances. Typical examples

include new business start-ups with parents contributing specific complementary capabilities that

constitute the basis for a new business. For instance, Airbus was a joint venture between French,

German, British and Spanish manufacturers that eventually became a single company. Each

national partner has specialized in one bit of aircraft manufacturing. The French became experts

in aircraft electronics and cockpit design, the British became world leaders in wing manufacturing,

the Germans concentrated on making fuselages and the Spanish focused on aircraft tails (Burdon,

Chelliah & Bhalla, 2009). Strategic alliance designed to respond to competition and to reduce

uncertainty can also create competitive advantages. However, these advantages tend to be more

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temporary those developed through complementary (both vertical and horizontal) strategic

alliances (Belal & Akhter, 2011).

A high degree of integration of specific parent resources is required to achieve goals and it is

desirable to create loyalty to a new business distinct from the parents because their interests might

otherwise prevent the success of collaboration (Kale and Singh, 2009). Toshiba and Motorola, for

example, created a semiconductor manufacturing alliance, even though the two parents competed

in downstream product areas. Direct parent-to-parent collaboration (often including licensing or

long-term contractual agreements) is appropriate when assets or resources are best kept in separate

parent organizations. Parent interests are competitive close parent control is required, and success

cannot be measured in terms of performance measures that apply to stand-alone businesses (for

instance, the main purpose is to learn). Learning may entail improving skills through working with

a partner or gaining access to countries. Turner Broadcasting, which is part of Time Warner, had

a deal with Philips, a Dutch electronics company, where Philips got the right to name a new sports

arena that TBS built in Atlanta. But TBS’s main motive was to find out more about European

consumers and about the digital communications hardware that is Philips’s stock-in-trade (Burdon,

Chelliah & Bhalla, 2009). In the same vein Margarita (2009) emphasizes that expertise and

knowledge can range from learning to deal with government regulations, production knowledge,

or learning how to acquire resources.

To eliminate business risks is another reason why alliances are formed. During the past few years,

Renault, General Motors and DaimlerChrysler have bought stakes in Nissan, Fuji Heavy Industries

(which makes Subaru brand cars), and Mitsubishi Motors, respectively (OECD, 2002). The idea

is that a stake in a Japanese carmaker, with a network of factories and dealerships in Asia, is a less

risky way to expand into the world’s fastest-growing automotive market than a full merger.

Also changing the name of the competitive game is of course one reason why firms form global

alliance. To manage industry rivalry, Star Alliance, which includes Lufthansa and United Airlines,

had a series of loose arrangements to share codes and direct passengers to partners’ flights; then it

began to look more like a quasi-merger, with shared executive lounges and pooled maintenance

facilities (Slywotzky and Hoban, 2007).

Types of Strategic Alliances

The strategic alliances can be mostly summarized into three dimensions: joint venture, equity

strategic alliance, and non-equity strategic alliance. This section reviews the literature on how the

three dimensions of strategic alliance may contribute to partner competitiveness and success in the

global business arena.

Joint Venture

A joint venture is an agreement by two or more parties to form a single entity to undertake a certain

project. When two or more firms form a legally independent firm to share their collaborative

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capabilities and resources to achieve competitive advantages in the market is termed as joint

venture in the form of strategic alliance. Joint ventures are effecting in establishing long-term

relationship and in transferring tacit knowledge. Because it cannot be codified, tacit knowledge is

learned through experiences (Berman et al, 2002) such as those taking place when people from

partner firms work together in joint venture. Expertise and experience in particular field foster the

sustainable competitive advantage. Tacit knowledge is an important source of competitive

advantage for many firms (Tiessen and Linton, 2000).In a joint venture project generally

participating firms share resources and participate in the operations management equally. “Sprint

and Virgin group’s joint venture, called Virgin Mobile USA, targets 15-to-30 years-old as

customers for pay-as-you-go wireless phone service. In another example, Sony Pictures

Entertainment, Warner Bros., Universal Pictures, Paramount Pictures, and Metro-Goldwyn-Mayer

Inc. each have a 20 percent share in joint venture to use the internet to deliver feature films on

demand to customers. According to Belal & Akhter, (2011) Joint ventures are optimal form of

alliances and different from any firm that independently does in the competitive market with own

resources by creating competitive advantages through sharing and combining resources and

capabilities of firms, and overall evidences support this statement. The coordination of

manufacturing and marketing allows ready access to new markets, intelligent data, and reciprocal

flows of technical information (Hoskinson and Busenitz, 2002).

Equity Strategic Alliance

Ownership percentage in equity strategic alliance is often not equal. Two or more firms own the

shares of newly formed company differently according to their contribution in resources and

capability sharing with ultimate goal of developing competitive advantages (Belal & Akhter,

2011). Internationalization of strategic alliances focuses on the linkages between two or more

different firms’ management capabilities and operations activities. The different corporate cultures

are matched into one goal in the strategic alliances when it crosses the boundaries of the country.

Many foreign direct investments such as those made by Japanese and U.S. companies in China are

completed through equity strategic alliances (Harzing, 2002).

Non-equity Strategic Alliance

A non-equity strategic alliance is less formal than a joint venture. To ensure competitive

advantages of two or more companies forming an alliance on a contract basis rather a separate

company and therefore don’t take equity shares (Belal & Akhter, 2011). They share their unique

capabilities and resources to create competitive advantages. Because of this, there is an informal

relationship built among the partners. Consequently, requires less formal relationship and partner

commitments than other forms of strategic alliances. So, the implementation process of non-equity

alliance is simple than other forms of alliances (Das et al, 1998). Since it is less formal relationship

in non-equity alliances, it does not need much of experience like others. In a complex venture

where success necessitates transfer of implied knowledge and expertise, non-equity strategic

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alliances are unsuitable because of their relative informality and lower commitment (Bierly and

Kessler, 2002).

However, firms today increasingly use this type of alliance in many different forms such as

licensing agreement, distribution agreements and supply contracts (Folta and Miller, 2002). The

external factors like uncertainty regarding technology and complex economic environment

motivate commitment in relationships. Competition from the rivals encourages the greater

commitments with partners. Strategic alliances in the form of cooperative strategies are increasing

practicing by the firms because of complexity in operations and high completive pressure. To be

successful in business and survive in the long run some sort of partnership is required in this age

of globalization. To manage the uncertainty and external complexity formation of strategic alliance

is an effective strategy (Inkpen, 2001). Partnership commitments assist to take the decision for

outsourcing. Outsourcing means acquiring value-creating primary or support activity from other

firms. And outsourcing decision helps to form non-equity alliances. To achieve competitive

advantages and less formality this form of alliances are becoming popular (Delio, 1999). Magna

International Inc., a leading global supplier of technologically advanced automotive systems,

components, and modules, has formed many non-equity strategic alliances with automotive

manufacturers who have outsourced by the awards honoring the quality of its work that Magna

has received from many of its customers, including General Motors, Ford Motor Company, Honda,

DaimlerChrysler, and Toyota (Magna, 2002).

Stages of Strategic Alliance Formation

Alliances evolve during their lifetime. The process and evolution of alliances underscore the

importance of the developmental stages. Although researchers agree that alliances evolve in stages,

there is no consensus on the specific stages that alliances go through. But before any other thing,

the intended firm has to develop its global strategy and this development would involve studying

the alliance’s feasibility, objectives and rationale, focusing on the major issues and challenges and

development of resource strategies for production, technology, and people. It requires aligning

alliance objectives with the overall corporate strategy Margarita, (2009). Following Das and Teng

(1999), this paper considers four stages to include: partner selection, structuring/negotiation,

implementation and performance evaluation. Specifically, each alliance is a repetitive sequence of

the four stages, and some stages may repeatedly occur as the alliance evolves (Ring and Van de

Ven, 1994; Doz, 1998; Arino and de la Torre, 1998). For example, after an alliance is formed, the

criteria for partner selection will be reconsidered when a new partner enters into the current

alliance. The initial alliance conditions (e.g., joint scope or division of labour) may have to be

renegotiated in the event of unforeseen changes in the environment and in the relationship status.

In some alliances, performance evaluation will recur regularly over time.

Partner selection

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Forming an alliance includes a series of choices and decisions. Selecting a good partner is a critical

first step. Partnering in international strategic alliance involves a thorough analysis of one’s own

organization in terms of current and potential future resources and capabilities required for its

success. This internal analysis – combined with a clearly defined set of strategic motives – can

help determine what additional resources and capabilities (both task-related and partner-related)

are necessary to ensure a high probability of a successful alliance or coalition (Nielsen, 2008).

Other scholars advocate factors concerning cultural (both corporate and national), strategic,

organizational, and financial traits of the partners (Yan and Luo, 2001).

Partner Selection emphasizes the desirability of a match between the partners’ resource profiles,

goals, incentives and strategies (Das and Teng, 2003). Some studies propose that firms should

consider potential partners’ reputation, experience, trustworthiness, capabilities and potential

contributions to the alliance as critical selection criteria (Jiang, Li, & Gao 2008; Brouthers,

Brouthers, Wilkinson, 1995; Gulati, 1995; Dyer, 1996). According to Nielsen, (2008) international

alliance experience is accumulated from prior engagements in international strategic alliances and

therefore when selecting a partner for an international strategic alliance, prior experience with

international collaboration on the part of the focal firm may influence the relative importance of

the selection criteria. Other studies highlight the importance of resource complementarities and

learning in the partner selection process (e.g., Lane and Lubatkin, 1998; Mowery, Oxley,

Silverman, 1998).

Generally, firms have either similar or diverse resource endowments. Researchers suggest that

firms should choose a partner with similar but complementary resources and capabilities (Murray

and Kotabe, 2005). On one hand, if firms are to effectively take advantage of the resources

involved in an alliance to achieve desired objectives (say, learning a new technology), the

resources must be complementary. If all partners have the same types of resources, there will be

little knowledge to share and also few benefits to receive. On the other hand, if firms are to

effectively understand, assimilate and absorb knowledge and skills involved in an alliance, they

must have already shared some basic knowledge relevant to the resources and capabilities. If such

overlap is lacking, firms may have incomplete information in identifying which ones can make

real contributions to the alliance and how to value and acquire knowledge from the partners.

The degree of resource complementarily will be a critical factor in determining an alliance’s future

course and

outcome.

Kim and Inkpen (2005) argue that a tension exists between the need for

diverse resources and a need for similar resources. More specifically, excessive resource similarity

indicates that the partners have little to learn from each other, a situation that restricts the

development pace of the alliance. But excessive resource diversity makes it difficult for partners

to learn from each other. It requires utilizing coordination mechanisms across activities, and as a

result the alliance will become difficult to manage (Jiang, Li, & Gao 2008). Therefore, a careful

balance between resource similarity and diversity is at least in theory optimal for a positive alliance

outcome.

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Partner reputation matters allot, firms should also make clear whether this partner has a reputation

for dealing fairly and performing well (Das and Teng, 2001). In the same vein, Jiang, Li, & Gao

(2008) posit that a reputation for trustworthiness and competence is an important strategic asset

and tends to be cumulative overtime. A good reputation signals the quality of a firm and

encourages other firms to ally with it. Another important consideration in partner selection is prior

experience, despite conflicting views, Jiang, Li, & Gao (2008) posit that prior ties are positive

predictors of future strategic alliance relationship success by providing a wide range of advantages

and benefits for the partners (see Kim and Inkpen, 2005; Richards and Yang, 2007).

Structuring/Negotiation

In this stage, partner firms should decide on appropriate governance forms, moderated scope of

collaborative activities, effective division of labour, and so forth. Firms can choose from two

primary alliance governance forms: equity and non-equity alliances. Osborn and Baughn (1990)

point out that the governance mode within an alliance may indicate the motives of the partners and

have a large impact on alliance evolution. For the same reason, Hennart (2006) argues that

choosing an ex ante contractor an equity JV is an important decision for alliance managers, and

the chosen type can impact subsequent behaviours of the partners and predict the future alliance

development and performance.

Equity joint ventures are found to be prevalently more suitable for complex relations that are

exposed to greater risk of opportunism and behavioural uncertainty. For example, the “non-

recoverable investments” and the mutual commitments in Joint ventures create a mutual hostage

situation that helps align the strategic goals of partners. This situation reduces relational risks,

deters opportunistic behaviours and builds up high exit costs (Pisano, 1989; Parkhe, 1993). Joint

ventures are also found to be associated with more trust and confidence, higher levels of structural

embeddedness and higher possibility of dispute resolution (Das and Teng, 2001). In this sense,

joint ventures are an internally stable governance form. By contrast, non-equity alliances that

involve looser inter-connection and fewer commitments are more likely to go through instability

and be more prone to failure.

Firms must also decide on the area of the task or functional interface between them (Gulati, 1995).

Generally, an alliance agreement may involve three separate functional areas or joint activities:

R&D, manufacturing and marketing (Kogut, 1989; Oxley and Sampson, 2004). Alliance scope

refers to the number of joint activities involved in an alliance. The scope of the joint activities can

vary considerably in different alliances. For instance, some cooperative arrangements are limited

to only a single activity (e.g., either R&D or manufacturing or marketing) while others involve

more functional areas. The scope of the multiple-activity or mixed-activity alliance is broader than

that of the single-activity alliance.

The chosen scope has critical significance for the subsequent dynamics of the alliance. For

instance, Kogut (1989) finds JVs to be more unstable in highly concentrated industries, particularly

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when the functional scope extends to marketing and after-sales service. Reuer, Zollo, & Singh,

(2002) argue that it will be more difficult for firms to manage an alliance with broader scope,

because it is accompanied by more uncertainty and more complexity about the implementation of

the activities at hand. The increasing scope of an alliance is expected to require greater extent of

coordination, incur proportionally higher costs, and increase the potential hazards of the

cooperation (Gulati and Singh, 1998). The need for higher levels of cooperation, coordination and

integration is also likely to increase the problems relating to incompatible goals, systems,

procedures and strategies. Predictably, an increase in the scope of an alliance will reduce the

likelihood of the alliance’s future success.

Reuer, Zollo, & Singh, (2002) emphasize the importance of division of labour as a major task

undertaken by partner firms. They argue that a clear division of labour and allocation of

responsibilities among partners can help decrease the governance changes of alliances. On one

hand, an express provision of division of labour is expected to lower the need of complex

coordination activities, decrease inter-partner disputes, and reduce the likelihood of relational

risks. On the other hand, a clear division of labour also encourages the partners to contribute more

resources to fulfil their responsibilities because the benefits the partners deserve may reasonably

be in accord with their contributions. It is reasonable to predict that alliances with a clear division

of labour may be more stable and successful than those with a blurry specification of responsibility

allocation.

Implementation

After the collaborative agreement is negotiated, partner firms will carry out the agreement and put

the cooperation into operation. Doz and Hamel (1998) argue that “managing the alliance

relationship over time is usually more important than crafting the initial formal design”. Among

the four stages, Jiang, Li, & Gao (2008) believe the implementation stage is possibly the most

pivotal one for alliance evolution and success. Accordingly, partners must take a variety of actions

to manage destabilizing factors and cope with disadvantageous conditions in due time.

As collaboration unfolds, various kinds of internal risks may emerge and become key factors

destabilizing the alliance. Das and Teng (1999 and 2001) categorize these risks into two primary

types: relational and performance. Relational risk is the probability and consequence of not having

satisfactory cooperation between partner firms. Performance risk refers to the factors that may

jeopardize the success of an alliance, even when the partners cooperate fully. Relational risks and

performance risks are ever-present in an alliance relationship. Relationships are also

acknowledged to be important and valuable, but they have also been considered complex and

difficult to manage (Dyer, 1996; Wong, Tjosvold, & Zhang, 2005). In an alliance context, inter-

partner relationships are a multi-faceted phenomenon which comprises the establishment,

development, maintenance and optimization of harmonious and reciprocal relationships shared by

all partners. Jiang, Li, & Gao (2008) posit that effective management of inter-partner relationships

International Journal of Global Business, 7 (1), 77-94, June 2014 89

constitutes the micro-foundation for strategic alliance success, and that it cannot be replaced by

such things as external factors.

Performance evaluation

After the alliance operates for some time, its performance can and should be evaluated with some

certain measures. Performance evaluation is the act of examining the extent to which the partners’

set objectives are met. When evaluated performance is better than one partner had expected, that

partner may try to maintain the collaborative relationship and invest more resources and

capabilities in order to benefit still more from the relationship in the future. But when the evaluated

performance is worse than expected, the partner may reduce its commitment and withdraw some

investments to limit future risks. Therefore, superior on-going performance of an alliance may

serve as a stabilizing force, while undesirable performance outcomes are likely to lead to instability

and partner exit (Gill and Butler, 2003).

In a complete sense, a firm’s performance evaluation should consider two aspects, that is, the costs

it undertakes and the benefits it deserves. In practice, disagreement may arise about appropriate

performance measures among partners (Yan, 1998). Firms usually tend to overestimate their own

expenditures but underestimate their partners’ contributions; they may also underestimate their

own benefits but overestimate those of the partners. Perceived inequity could therefore occur either

when a firm perceives itself to have contributed more into the alliance than it has received or if the

firm perceives its benefit–cost ratio is largely lower than that of its partners (e.g., Ariño and de la

Torre, 1998; Kumar and Nti, 1998). A firm’s perception of inequity is related to the degree of its

satisfaction with the relationship. When a firm perceives the existence of inequity, it may feel

“unfair”, and it is “less willing to undertake an alliance or continue a particular alliance in the same

form” (White, 2005). If the perceived inequity cannot be eliminated over a long period of time,

the alliance will be either restructured or terminated (Das and Teng, 2002). Accordingly,

researchers suggest that a firm can minimize the perceived inequity either by increasing its

benefits/reducing the partner’s benefits, or by reducing its costs/increasing the partner’s costs.

Conclusion

From all the forgoing explanations and as the pace of global business accelerates, and customers

continually become more demanding and sophisticated, companies are finding the competitive

landscape dramatically changing. Markets are moving so quickly that is very difficult for one

company to stay current on all technologies, resources, competencies, and information needed to

attack, and be successful in those markets. Strategic alliances offer a means for companies to

access new markets, expand geographic reach, obtain cutting-edge technology, and complement

skills and core competencies relatively fast. Strategic alliances have become a key source of

competitive advantage for firms and have allowed them to cope with increasing organizational and

technological Complexities that have emerged in the global market. Nowadays, global strategic

International Journal of Global Business, 7 (1), 77-94, June 2014 90

alliances are a business concept that is changing the structure and dynamics of competition

throughout the world. Using a broad interpretation, strategic alliance is understood to be a

relationship between firms to create more value than they can on their own. The firms unite to

reach objectives of a common interest, while remaining independent.

It can therefore be concluded that companies really involve in foreign investment would have to

build or have an ally within the business scene; and they would have to as well build a strategy

applicable to every market they serve: reason being that, the atmosphere of international operation

is very broad and demanding and to survive the ‘heat’ optimum consideration must be given to

business coalition and strategy.

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87F E A T U R E A R T I C L E

Published online in Wiley Online Library (wileyonlinelibrary.com)

Correspondence to:

Jenny Berrill

, School of Business, Trinity College, Dublin, Ireland, +353 1 896 2632 (phone), +353 1 679 9503 (fax),

jenny.berrill@tcd.ie

Are the World’s

Largest Firms Regional

or Global?

I n t r o d u c t i o n

T
he pace of globalization over the past quarter cen-

tury has been widely documented and analyzed

by international business (IB) and management

analysts, practitioners, researchers, and policymakers.1

The world’s largest multinational enterprises (MNEs)

have been well placed to avail of these opportunities, and

they have responded by internationalizing their activities

across greater geographic, cultural, and psychic distances

by trading, licensing, and forming strategic alliances and

joint ventures, and via foreign direct investment (FDI).

The Forbes Global 2000 list of the world’s largest MNEs—

based on assets, sales, profits, and market values—shows

that in 2013 these firms collectively owned $159 trillion in

assets, earned $38 trillion in revenues and $2.43 trillion

in profits, and employed about 87 million people. Many

of them are recognizable household names in the bank-

ing, electronics, entertainment, food, oil, and transport

industries. Using gross domestic product (GDP) data

from the World Bank and firm-level sales data from the

Fortune 500 list, White (2012) shows that of the world’s

175 largest economic entities, 64 are countries and 111

are MNEs! This conjures an image of a business world

dominated by gargantuan companies with operations in

every corner of the globe.

But are the world’s largest firms global in their

operations, strategy, and vision? This continues to be a

hotly debated topic2 and is the subject matter of many

recent papers, including Xue, Zheng, and Lund (2013);

Ibeh, Wilson, and Chizema (2012); Lattemann, Alon,

Chang, Fetscherin, and McIntyre (2012); and Ning and

Sutherland (2012). Although many IB scholars such as

Yip (2002) and Govindarajan and Gupta (2008) argue

There has been vigorous debate about whether the world’s largest fi rms are regional or global in their

operations and strategy. Some authors argue that global vision and strategy are essential for most

fi rms in today’s interconnected world, while others claim that even the largest multinational fi rms are

mostly confi ned to their home regions—and that global strategy is a myth. Using a novel data set of

over 1,000 of the world’s largest fi rms, we provide a new perspective on this debate. We show that

these fi rms range from domestic to regional, transregional, and global, with the implication that global

Jenny Berrill

88 F E A T U R E A R T I C L E

Thunderbird International Business Review Vol. 57, No. 2 March/April 2015 DOI: 10.1002/tie

the extent to which it implies that global strategy is a

myth.

In assessing the merits of these competing findings, it

is important that the meanings attributed to key concepts

are clear and unambiguous, and that terms are appropri-

ately defined. This is not always the case in IB and man-

agement research. The definition of regional, for example,
shapes the conclusions that emerge about international

reach and strategy (Tallman & Phene, 2007; Vives &

Svejenova, 2007), and this is confounded by the variety

of approaches used to measure firm-level multinational-

ity. In their review of the regionalization- globalization

debate, Flores and Aguilera (2007) highlight the need for

“an improved definition and operationalization of MNE

activities and regions” (p. 1189).

We take up this challenge by using the classification

scheme for firm-level multinationality of Aggarwal, Berrill,

Hutson, and Kearney (2011) (hereafter AHBK) and a

novel data set to address the regional/global debate. In

ABHK’s scheme, firms are classified on the basis of the

breadth and depth of international engagement across

six regions that encompass all countries of the world:

Africa, Asia, Europe, North America, Oceania, and South

America. We construct a sample of 1,289 firms from the
G7 countries: Britain, Canada, France, Germany, Italy,

Japan, and the United States. Our sample, which we refer

to as the G7-1289 list, comprises all constituent firms of

these countries’ main stock indexes (the FTSE 100, the

TSX 60, the SBF 120, the HDAX 110, the MIB-SGI 174,

the Nikkei 225, and the S&P 500) for which we have the

full set of data. This data set is more than three times

the size of others used by the researchers referred to

above,3 and it contains many more firms from each of

the G7 countries than the Fortune 500 list (which is the

most common data source used in similar studies). Its

constituent firms comprise an eclectic mix of industry sec-

tor, country of headquarters, size, age, and international

reach. Using the G7-1289 list, we determine each firm’s

degree of multinationality using the depth dimensions

sales and subsidiaries. We find that the world’s largest firms
range from purely domestic to global and that most are

transregional. It follows that with respect to the world’s

largest firms, global strategy is not a myth but a reality of

international business in the third millennium.

Our findings have important practical as well as

academic implications. A detailed and robust investiga-

tion into the location of a firm’s sales and subsidiaries is

required to adequately assess the true exposures under-

taken when investing in a stock. Our analysis can help

in this regard. This point becomes even more important

as firms become more international in their operations.

that global business strategy is paramount, others such

as Ghemawat (2001, 2003) argue the case for semiglobal

strategy, pointing to escalating costs of international-

izing over greater geographical and cultural distances.

Doremus, Keller, Pauly, and Reich (1998) argue that

we have not achieved anything remotely close to glo-

balization, that state sovereignty remains strong, and

that the world’s largest MNEs retain a national and

regional focus. Rugman (2000, 2003, 2005), Rugman

and Brain (2003), Rugman and Girod (2003), Rugman

and Hodgetts (2001), Rugman and Verbeke (2003, 2004,

2007, 2008), and Collinson and Rugman (2008) argue

the case for the regional dimension in international busi-

ness and strategy. Borrowing from the “triad” analysis of

Ohmae (1985), these authors divide the world into three

regions—North America, Europe, and Asia-Pacific—and

argue that most of the world’s largest MNEs are regional

rather than global, that globalization is a myth, and that

regional rather than global strategy is paramount in IB.

The evidence assembled by Rugman and his co-authors

in favor of regionalization rather than globalization of

the world’s largest firms has been scrutinized by Aharoni

(2006); Osegowitsch and Sammartino (2007, 2008); Dun-

ning, Fujita, and Yakova (2007); and Asmussen (2009).

These researchers have introduced refinements to the

data analysis to show that the evidence in favor of region-

alization is not overwhelming, and they have questioned

These researchers have
introduced refinements to
the data analysis to show
that the evidence in favor of
regionalization is not over-
whelming, and they have
questioned the extent to
which it implies that global
strategy is a myth.

Are the World’s Largest Firms Regional or Global? 89

DOI: 10.1002/tie Thunderbird International Business Review Vol. 57, No. 2 March/April 2015

economic events, and that sales—the principal metric

used by the regionalists—does not adequately capture the

richness of MNEs’ international activities (Bird & Stevens,

2003; Clark & Knowles, 2003; Clark, Knowles, & Hodis,

2004; Stevens & Bird, 2004).

Proponents of the triad approach to studying the

geographic reach of the world’s largest MNEs base

their analysis on the observation that North America,

Europe, and Asia-Pacific dominate international busi-

ness (Ohmae, 1985; Rugman, 2003). These researchers

use various sets of countries to define alternatively the

“core triad” (United States, European Union [EU], and

Japan), the “triad” (North American Free Trade Agree-

ment [NAFTA], the EU-15, and Asia), and the “extended

triad” (NAFTA, the expanded EU-25, and Asia). In so

doing, they explicitly recognize that their approach

should be considered as a starting point for a regional

component in IB research, and that other delineations

could be useful depending on the context. In the triad

studies, however, it is not always clear which triad is being

analyzed. Perhaps the clearest definition is in Rugman

and Hodgetts (2001), where footnote 4 defines NAFTA

as comprising Canada, Mexico, and the Unites States;

the EU-15 comprises Austria, Belgium, Britain, Denmark,

Finland, France, Germany, Greece, Ireland, Italy, Lux-

embourg, the Netherlands, Portugal, Spain, and Sweden;

and the Asia-Pacific-12 comprises Australia, China, India,

Indonesia, Japan, Malaysia, New Zealand, the Philippines,

Singapore, South Korea, Taiwan, and Thailand. In other

papers, definitions of the triad are less clear.4

Rugman and his co-authors apply thresholds to deter-

mine the degree of multinationality using four categories:

home-regional, biregional, host-regional, and global.

The thresholds are as follows: Home-regional firms have

at least 50% of their sales in their home region, and

biregional firms have less than 50% of their sales in any

one region and at least 20% in each of two triad regions.

Host-regional firms have at least 50% of their sales in

a triad region other than the home region, and global

firms have less than 50% of their sales in any one region

and at least 20% in each of the three triad regions. Their

benchmark data set is the Fortune 500 list, which ranks

firms on the basis of absolute sales figures in any given

year. Rugman (2003) shows that most firms in the For-

tune 500 lack global sales activity; 72% of sales are within

the home region. He classifies only 9 firms as truly global

in that they have at least 20% of their sales in each region

of the triad, and most of these are in the computer,

telecom, and high-technology sectors. Fifty-eight have

no sales outside the home region. Rugman concludes

that most firms are regional or, at best, are biregional.

The more multinational a firm is, the more diversified it

is in relation to geographic exposure and the less likely it

is to be exposed to domestic events. A global firm, there-

fore, provides diversified geographic exposure regardless

of its country of origin. A regional firm is more likely

to provide exposure only to a specific region. There-

fore, the question as to whether firms are regional or

global has important implications for optimal portfolio

construction.

The remainder of our article is structured as follows.

In the next section, we review the debate about the extent

to which the world’s largest firms are regional or global.

In the third section, we use ABHK’s multinationality

classification scheme to classify two samples of firms: the

G7-1289 and the 2005 Fortune 500. The fourth section

compares our findings to those of Rugman and Verbeke

(2003, 2004), Dunning et al. (2007), and Osegowitsch

and Sammartino (2008). In the fifth section, we repeat

the analysis using alternative regional groupings. We

present our concluding comments in the final section.

T h e D e b a t e t o D a t e : R e g i o n a l ,
T r a n s r e g i o n a l , o r G l o b a l ?

Although the trends toward enhanced international inte-

gration are widely recognized, interpretations and opera-

tional definitions of the terms globalization, regionalization,
and regionalism vary depending on the contexts in which
they are used. The new regionalism theory described by

Hettne, Inotai, and Sunkel (1999) analyzes regional and

global interdependencies at multidimensional levels in a

historical context. International integration increasingly

has involved production, distribution, and consumption

systems, and it has also seen economic and political ideol-

ogies, knowledge, and cultural identities being expressed

and manifested in global rather than country-specific

contexts. The process is not unidirectional, however,

because international regionalism has emerged in many

dimensions as a counterforce to globalization. Marchand,

Boas, and Shaw (1999), for example, show that while

regionalization can be seen as part of the globalization

process, it can also be seen as the reaction by stakeholders

to protect their perceived interests in the face of global-

ization. The regional actions of governments on issues

such as international finance (managed floats, fixed pegs,

currency unions, and regulation of institutions), trading

agreements (preferential tariffs, free trade areas, and eco-

nomic unions), and security agreements (such as NATO

and SEATO) form the complex landscape within which

MNEs operate and compete. Other researchers have

argued that globalization is about more than trade and

90 F E A T U R E A R T I C L E

Thunderbird International Business Review Vol. 57, No. 2 March/April 2015 DOI: 10.1002/tie

operations within its region, R is further delineated into

three categories: R1 (penetrating less than one-third

of the countries in the region), R2 (between one-third

and two-thirds of the countries) and R3 (more than two-

thirds). For example, a Brazilian firm headquartered in

Sao Paulo that sells its products in one or two countries

in South America would be classified as R1 in sales,

whereas if it exports throughout South America (but not

elsewhere), it would be classified as R3. If a firm conducts

business in more than one region (but not globally), it is

defined as transregional (T); T2 denotes two regions, T3

three regions, T4 four regions, and T5 five regions. A firm

is classified as global (G) if it conducts business in all six

regions. Figure 1 depicts this system.

To implement the depth dimension, we use sales and

investments (subsidiaries). The simple matrix illustrated

in Table 1 shows how the depth dimension operates in

conjunction with the breadth dimension. For ease of

exposition, we initially use the four broad dimensions of

In a similar analysis, Rugman and Verbeke (2004) define

the triad as NAFTA, the expanded EU, and Asia, and

also conclude that most of the Fortune 500 firms do not

operate globally. For the 320 firms for which geographic

sales data were available, they found an average of 80%

of sales are in their home regions. Rugman and Collinson

(2005) use the same Fortune 500 list and extract its 118

European firms. They find that only three firms—LVMH,

Philips, and Nokia—are global,5 and that an average of

63% of their sales are in the home region of Europe.

While these studies use sales data as the sole measure

of multinationality, Rugman and Collinson (2008) use

data for both marketing (sales) and production (assets).

They analyze 64 Japanese firms from the Fortune 500 list

(2003) and they find that only 3 firms operate globally,

whereas 57 firms have an average of 81% of their sales in

their home region. Both sets of data (on sales and assets)

confirm the regional nature of the activities of Japanese

MNEs, and Rugman and Collinson conclude that most

Japanese firms are regional, not global. Rugman and

Brain (2003) show that even the 20 most international

firms on the Fortune 500 list—those with the highest
ratio of foreign to total sales—are mainly home-region

based. Extrapolating from this body of evidence, Rugman

and his co-authors conclude that MNE strategy is regional

rather than global, and they suggest that MNE CEOs

should “encourage all [their] managers to think regional,

act local—and forget global” (Rugman & Hodgetts, 2001,

pp. 341).

C l a s s i f y i n g t h e M u l t i n a t i o n a l i t y
o f F i r m s

We classify firms using the multinational classification

scheme of Aggarwal et al. (2011). ABHK measure the

multinationality of each firm along two dimensions:

breadth and depth. To implement the breadth dimension,
they divide the world into six regions based on the inhab-

ited continents: Africa, Asia, Europe, North America,

Oceania, and South America.6 Depth of international

engagement ranges from the “shallow” engagement asso-

ciated with exports and imports, to the deep commitment

of FDI—which involves a much greater engagement with

foreign markets and higher exposures to foreign business

and economic and political risks than, say, exporting or

licensing. Along a particular depth dimension, each firm

is classified as follows. A firm whose business activities

take place entirely within its home country is defined

as domestic (D), and a firm with business activities in

the region in which it is headquartered is referred to as

regional (R). To shed more light on the extent of a firm’s

Depth of international
engagement ranges from
the “shallow” engagement
associated with exports
and imports, to the deep
commitment of FDI—which
involves a much greater
engagement with foreign
markets and higher expo-
sures to foreign business
and economic and political
risks than, say, exporting or
licensing.

Are the World’s Largest Firms Regional or Global? 91

DOI: 10.1002/tie Thunderbird International Business Review Vol. 57, No. 2 March/April 2015

and domestic in investments (SR-ID), and regional in

both (SR-IR). Third, transregional firms have either sales

or investments beyond their home region (but not in

all six regions), and there are five types of transregional

firm (5 to 9). Finally, there are seven categories of global

corporation (10 to 16), which have either sales, invest-

ments, or both in all six regions. The most global are

those with sales and subsidiaries in all six regions of the

world (16: SG-IG).

Classifying the Sample Firms

In our analysis we classify firms on the G7-1289 list, which

comprises 1,289 firms listed on the stock exchanges in

Canada, France, Germany, Italy, Japan, the United King-

dom, and the United States that are constituent firms of

the following stock market indexes: the TSX 60, the SBF

120, the HDAX 110, the MIB-SGI 174, the Nikkei 225, the
FTSE 100, and the S&P 500. This list was compiled from

the website of each country’s stock exchange in 2006. To

facilitate a more direct comparison with prior research,

we also classify firms on the Fortune 500 list (2005). The

geographic breakdown of firm-level sales was obtained

breadth: domestic (D), regional (R), transregional (T),

and global (G).

In Table 2, we combine these four breadth dimen-

sions with our two depth dimensions—sales and subsid-

iaries—to identify 16 types of firm. The first is the purely
domestic firm (SD-ID) that operates entirely within its

home country. Second, there are three types of regional

firm—with sales or investments, or both sales and invest-

ments in their home region, but not beyond. They are

numbered 2, 3, and 4: consecutively, domestic in sales

and regional in investments (SD-IR), regional in sales

TABLE 1 Matrix of Multinationality

Breadth of Geographic Spread

Depth of Engagement Domestic Regional Transregional Global

Sales SD SR ST SG

Investments
( subsidiaries)

ID IR IT IG

Note: This table illustrates the matrix of multinationality as originally pro-
posed by Aggarwal et al. (2011).

Note: This fi gure depicts the breadth and depth dimensions of fi rm-level multinationality. The breadth of geographical spread contains four categories: domestic
(D), regional (R), transregional (T) and global (G). The regional (R) category is further divided into three subcategories. Firms with operations in up to one-third,
between one-third and two-thirds, and in over two-thirds of the countries in their home regions are categorized as R1, R2, and R3, respectively. The transre-
gional category (T) has fi ve subcategories. Firms with operations in only their home regions are categorized as R. Firms with operations in up to two, three, four,
and fi ve of the six world regions are categorized as T2, T3, T4, and T5, respectively. Firms with operations in all six regions are classifi ed as G. The six world
regions divide the world into the inhabited continents of Africa, Asia, Europe, North America, Oceania, and South America. The depth dimension contains two
categories: sales (S) and investments in subsidiaries (I). This fi gure is created by the author based on the classifi cation system originally proposed by Aggarwal
et al. (ABHK) (2011).

FIGURE 1 The Breadth and Depth of Firm-Level Multinationality

92 F E A T U R E A R T I C L E

Thunderbird International Business Review Vol. 57, No. 2 March/April 2015 DOI: 10.1002/tie

mean incorporation date of 1927, implying an average

age of about 80 years. The oldest is over 500 years old

(UniCredito Italiano, incorporated in 1473), and the

two youngest date from 2003 (China Life Insurance and

Japan Post). The largest firm is again Exxon Mobil, with

annual sales of US$340 billion, and the smallest is Nike,

with US$13.7 billion; the average size is US$38 billion.

Firms are headquartered in 32 countries in five of the

six geographic regions in our system: North America

(189), Europe (177), Asia (121), Oceania (8), and South

America (5).

In Table 2 we provide information on the number of

firms from our G7-1289 and Fortune 500 data sets in each
firm type category. In this analysis, we include only firms

for which both sales and subsidiary data are available; 351

Fortune 500 firms and 1,015 G7 firms. The Fortune 500

firms populate 12 of the 16 categories. An illuminating

finding from this analysis is that nearly half of the For-

tune 500 sample firms are transregional in both sales and

subsidiaries (ST-IT). Twenty-seven are fully domestic in

from Worldscope and is drawn from company accounts
for the year ending December 31, 2005. The geographic

breakdown of each firm’s subsidiaries was obtained from

Dun and Bradstreet’s Who Owns Whom (2005–2006),
which lists the parents and subsidiaries of firms and the

country of each subsidiary.

Our G7-1289 data set includes firms in 10 broad

Industry Classification Benchmark (ICB) industries:

industrials (237 firms), financials (231), consumer ser-

vices (195), consumer goods (174), technology (109),

basic materials (106), health care (88), oil and gas (65),

utilities (62), and telecommunications (22). The mean

incorporation date is 1922—Banca Monte dei Paschi

dates from 1472, while NYSE Euronext was incorporated

in 2007. The largest firm is Exxon Mobil, and average

size by sales is US$14 billion. The Fortune 500 firms

span seven broad ICB categories: financials (126 firms),

consumer goods (123), consumer services (118), indus-

trials (53), basic materials (38), utilities (27), and health

care (15). They are on average rather elderly, with a

TABLE 2 Firm Types by International Reach

Symbol MNE Type Fortune 500

G7-1289

Purely Domestic Firm

1 SD-ID Domestic trading, domestic investments 27 (7.7) 107 (10.5)

Regional and Transregional Firms

2 SD-IR Domestic trading, regional investments 5 (1.4) 28 (2.8)

3 SR-ID Regional trading, domestic investments 2 (0.6) 14 (1.4)

4 SR-IR Regional trading, regional investments 4 (1.1) 14 (1.4)

5 ST-ID Transregional trading, domestic investments 3 (0.9) 17 (1.7)

6 ST-IR Transregional trading, regional investments 3 (0.9) 17 (1.7)

7 SD-IT Domestic trading, transregional investments 20 (5.7) 73 (7.2)

8 SR-IT Regional trading, transregional investments 2 (0.6) 41 (4.0)

9 ST-IT Transregional trading, transregional investments 171 (48.7) 538 (53.0)

Global Firms

10 SG-ID Global trading, domestic investments 2 (0.2)

11 SG-IR Global trading, regional investments

12 SG-IT Global trading, transregional investments 12 (3.4) 53 (5.2)

13 SD-IG Domestic trading, global investments 4 (0.4)

14 SR-IG Regional trading, global investments 4 (0.4)

15 ST-IG Transregional trading, global investments 89 (25.4) 87 (8.6)

16 SG-IG Global trading, global investments 13 (3.7) 16 (1.6)

Total 351 1,015

Note: In this table we use a simplifi ed matrix of our two-dimensional measure of multinationality to describe 16 types of MNE, ranging from purely domestic to
fully global fi rms. The right-hand columns show the number of fi rms from the Fortune 500 list (2005) and the G7 1289 in each category. Figures in parentheses
are percentages.

Are the World’s Largest Firms Regional or Global? 93

DOI: 10.1002/tie Thunderbird International Business Review Vol. 57, No. 2 March/April 2015

the sales and subsidiary dimensions, and another 30 are

domestic in at least one dimension. Thirteen are global

in both dimensions (including such firms as JPMorgan

Chase, Volkswagen, Nestlé, British American Tobacco,

and 3M), and 114 firms (32% of the Fortune 500) are

global in at least one dimension.

The G7 firms are more varied in the extent of their
multinationality, populating all but one of our 16 multina-

tionality categories. Similarly to the Fortune 500 firms, the

majority of the G7 firms—53%—are transregional in both

the sales and subsidiaries dimensions. In fact, the propor-

tion of firms in each category is similar for both samples.

Another feature common to both samples is that there is

little evidence of firm-level regionality. This provides an

interesting counterpoint to Rugman’s contention that

TABLE 3 International Breadth of the Fortune 500 and G7-1289 Firms

Fortune 500

G7-1289

Canada France Germany Italy Japan United Kingdom United States Total G7

Panel A: Sales

D 53 (14) 13 (23) 6 (6) 5 (5) 46 (30) 16 (9) 7 (8) 136 (29) 229 (20)

R1 8 (2) 7 (12) 8 (7) 3 (3) 7 (5) 5 (6) 10 (2) 40 (4)

T2 76 (20) 17 (30) 16 (15) 26 (27) 37 (24) 33 (20) 22 (24) 110 (23) 261 (23)

T3 70 (19) 10 (18) 23 (21) 19 (19) 16 (11) 45 (27) 16 (18) 78 (17) 207 (18)

T4 78 (22) 7 (12) 27 (25) 15 (15) 20 (13) 49 (29) 19 (21) 78 (17) 215 (19)

T5 61 (16) 3 (5) 21 (20) 24 (24) 17 (11) 25 (15) 14 (15) 48 (10) 152 (13)

T 285 (77) 37 (65) 87 (81) 84 (85) 90 (59) 152 (91) 71 (78) 314 (67) 835 (73)

G 28 (7) 6 (6) 7 (7) 9 (6) 7 (8) 10 (2) 39 (3)

Total 374 57 107 99 152 168 90 470 1143

Panel B: Subsidiaries

D 47 (10) 5 (12) 19 (18) 5 (5) 50 (36) 20 (9) 6 (7) 87 (18) 192 (17)

R1 28 (6) 20 (20) 13 (13) 31 (23) 6 (3) 13 (15) 34 (7) 117 (10)

R2 1 (1) 3 (3) 4 (3) 8 (1)

R 28 (6) 21 (21) 16 (16) 35 (26) 6 (3) 13 (15) 34 (7) 125 (11)

T2 55 (12) 16 (37) 9 (9) 19 (19) 19 (14) 29 (14) 11 (12) 75 (16) 178 (15)

T3 72 (16) 11 (25) 15 (15) 17 (17) 13 (10) 58 (28) 12 (14) 70 (15) 196 (17)

T4 64 (14) 8 (19) 14 (14) 9 (9) 6 (4) 53 (25) 14 (16) 67 (14) 171 (15)

T5 86 (19) 2 (5) 5 (5) 7 (7) 4 (3) 28 (13) 13 (15) 85 (18) 144 (12)

T 277 (61) 37 (86) 43 (42) 52 (52) 42 (31) 168 (80) 50 (57) 297 (63) 689 (59)

G 103 (23) 1 (2) 19 (19) 26 (27) 10 (7) 16 (8) 19 (21) 58 (12) 149 (13)

Total 455 43 102 99 137 210 88 476 1155

Note: This table details the number of Fortune 500 and G7 1298 fi rms in each breadth category, by sales (Panel A) and subsidiaries (Panel B). Sales data
are available for 1,143 of our G7 1289 sample and for 374 fi rms in the Fortune 500; and subsidiaries data are available for 1,155 G7 fi rms and 455 of the
Fortune 500 fi rms. The four main breadth categories—domestic, regional, transregional, and global—appear in bold. Each cell details the number of fi rms in

that category, and in parentheses, the percentage of fi rms in that category. For example, sales information is available for 168 fi rms on the Nikkei index; 16
fi rms (9 percent) are classifi ed as domestic and 49 fi rms (29 percent) as T4.

MNEs are regional entities. In a later section of this article,

we classify the Fortune 500 firms using the triad approach

in order to investigate in greater detail why our findings

differ so substantially from those of Rugman and his co-

authors.

Table 3 presents our findings for the multinational

classification of our Fortune 500 and G7 firms. It differs
from Table 2 in three ways. First, we use the full range of

breadth categories: D, R1, R2, R3, T2, T3, T4, T5, and G.

Second, we detail the breakdown of multinationality by

sales (Panel A) and subsidiaries (Panel B) separately; and

third, we separate our G7 findings by country. The per-

centage of firms that are domestic in sales ranges from

5% in Germany to 30% in Italy, and overall 20% of firms

do not sell their products or services beyond their own

94 F E A T U R E A R T I C L E

Thunderbird International Business Review Vol. 57, No. 2 March/April 2015 DOI: 10.1002/tie

sample firms’ home region. The situation is similar when

the extent of multinationality is measured by subsidiaries;

only eight of the G7 firms (1% of the overall sample) are

classified as R2, meaning that they have subsidiaries in

between one-third and two-thirds of the countries in their

home region. Not only do we find that only a small pro-

portion of our sample firms are regional; it is clear that

few have a genuinely regional scope in the sense that they

operate in few countries in the home region.

C o m p a r i n g O u r F i n d i n g s t o T h a t
o f t h e T r i a d S y s t e m

In this section, we categorize the Fortune 500 (2005)

sample firms using Rugman and Verbeke’s (2004) triad

grouping. Of the 349 firms for which sales data are

available,7 we find that 283 (81%) are classified as home-

region orientated, 9 (3%) are host-region orientated,

50 (14%) are biregional, and 7 (2%) are global. The 7

firms classified as global are Christian Dior, Coca-Cola,

HSBC Holdings, Henkel, Mazda Motors, Schlumberger,

and Sony. Using our system, these 7 firms are classified

as transregional in sales. Sony, for example, has sales in

four of the six regions, with 21% of its sales in Europe,

30% in North America, and 31% in Asia. Another exam-

ple is HSBC, which we classify as T4. It has 35% of its

sales in Europe, 36% in North America, and 24% in Asia.

We classify 28 firms as global in sales.8 Using Rugman

and Verbeke’s (2004) system, 13 of these firms would be

seen as home-region orientated because they have at least

50% of their sales in their home region; another 13 would

be biregional, and 2 cannot be classified.9 There are no

firms common to Rugman and Verbeke’s (2004) global

and ABHK’s G category. Of the 53 firms that we classify as

domestic in sales, 52 would be classified by Rugman and

Verbeke’s (2004) system as home-region orientated, and

the remaining firm (J. Sainsbury) is host-region orientated.

When we take the 283 firms classified as home-region

orientated by Rugman and Verbeke (2004) and reclassify

them using our system, we find that 52 are domestic firms,

6 are regional, 211 are transregional, and 13 are global.

The main reasons for the substantial difference in

our findings and Rugman and Verbeke’s (2004) is that

they apply a stringent activity threshold, and that they use

a different and rather restricted delineation of regions—

the triad. The claim by Rugman and his co-authors

that the world’s largest firms are mostly home-region

orientated and that very few are global in their reach

and strategic vision has been scrutinized by a number of

researchers, including Aharoni (2006), Asmussen (2009),

Westney (2006), Osegowitsch and Sammartino (2007,

border. Similar numbers are apparent in the subsidiary

data. Again, the extremes are to be found in Germany

and Italy; 5% of German firms have only domestic sub-

sidiaries, compared to 36% of Italian firms, and 17% of

overall sample firms have no foreign subsidiaries. At the

other end of the multinationality spectrum, the propor-

tion of firms with global sales ranges from 8% for the

United Kingdom to none for Canada and Japan. By sub-

sidiaries, only 2% of Canadian firms are global, whereas

German firms in general have a very strong global pres-

ence, with just over a quarter having a global spread of

subsidiaries.

Consistent with the information summarized in

Table 2, across all countries (and in the Fortune 500

group), the majority of firms are transregional. Seventy-

six percent of G7-1289 firms are transregional or global in

their sales, and 72% are transregional or global in subsid-

iaries. Similar proportions are apparent for the Fortune

500 sample; 77% are transregional in sales and 61% in

subsidiaries. Adding these transregional firms together

with the global firms, the vast majority (313 firms or 84%)

of the Fortune 500 firms trade beyond their home region,

and the same proportion (380 firms or 84%) of them

have subsidiaries beyond their home region. However, if

a firm is classified as global, it is more likely to be on the

investment rather than the sales dimension.

An illuminating and novel finding is that all of the

regional firms are R1 in sales (Panel A of Table 3); that is,
there are no firms with sales in more than one-third of the

Not only do we find that
only a small proportion
of our sample firms are
regional; it is clear that few
have a genuinely regional
scope in the sense that they
operate in few countries in
the home region.

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DOI: 10.1002/tie Thunderbird International Business Review Vol. 57, No. 2 March/April 2015

analysis. While business activity is at present concentrated

in these regions, there is no certainty that this will con-

tinue to be the case. Internationalization at the level of

the firm, industry, and country evolve continuously over

time, and the geographic distribution of production, invest-

ment, and consumption are becoming ever more dynamic

(United Nations Conference on Trade and Development

[ UNCTAD], 2006). The emergence of eastern Europe

from communism in the early 1990s, the rapid rise of China

and India during the past two decades and their increasing

engagement with Africa, and more recent trends such as the

rise of the South American economies and increasing flows

of FDI into Africa are all firmly on the research agendas of

IB scholars. These factors, together with the insights to be

gained from longitudinal studies, suggest that a broader

definition of regions would be more appropriate and useful.

Third, as was pointed out by Osegowitsch and Sam-

martino (2008), there is no room in the triad system

for the fully domestic firm because the “home” region

includes the home country, and this category therefore

includes domestic firms. This exaggerates estimates of

regionalism in the triad analysis. Further, the inclusion

of fully domestic firms in the home-regional category

inflates the relative size and importance of the home

region. Eden (2008) points out how the triad analysis is

biased toward home-regional for firms headquartered in

large countries because domestic sales are included in

their home-regional sales.

The ABHK classification scheme provides an alter-

native to the triad system. It has the advantage that it

includes the entire geography of the world and is there-

fore more inclusive than the triad regions. Osegowitsch

and Sammartino (2008) and Dunning et al. (2007) have
shown that there are strong trends to greater interna-

tionalization at the firm and country levels in recent

years. The ABHK system allows for changing patterns of

internationalization over time. Regions are based on the

geographic rather than the political map of the world, as

political boundaries and groupings change over time. It is

also noteworthy that ABHK’s system is nonhierarchical in

the sense that categories with increasing degrees of mul-

tinationality do not subsume those with lower degrees of

multinationality. This turns out to be important because

when we apply it to the Fortune 500 firms, no firm has full

regional penetration while most are transregional. This is

consistent with a pattern of internationalization among

the world’s largest firms in which they tend to move from

being domestic to operating within a small number of

countries in their home region, to then taking a signifi-

cant step to being transregional without first spreading

more fully across their home region. In short, we find that

2008), and Dunning et al. (2007). The main issues of

debate concern the appropriateness of the triad regions,

the effects of imposing thresholds on the level of activity

within and across regions in classifying firms, and the

extent to which the conclusions about global or regional

strategic vision are supported by the analysis. We now

discuss each of these in turn.

The Triad Regions

The triad regions used by Rugman and his co-authors

are defined in a manner that compromises the analysis

from the start and restricts its usefulness to a broader set

of issues in international business research. We identify

three main issues. First, the “triad” was advocated by

Ohmae (1985) and expanded upon by Rugman and his

co-authors on the basis that it incorporates the world’s

largest markets and is headquarters to most of the world’s

largest firms. This is indisputable. However, the triad

analysis is narrow in the sense that it explicitly excludes

countries and firms that are of considerable interest to IB

scholars. Many of the emerging economies in Asia, east-

ern Europe, the Middle East, and South America are not

in the triad, and neither is the whole continent of Africa.

A firm cannot be analyzed using Rugman and Verbeke’s

(2004) system if it is headquartered outside the triad

regions. The omitted countries are becoming important

as destination countries for FDI and exports by triad-

based MNEs as well as in global supply chains (Flores &

Aguilera, 2007), and the triad framework cannot be used

for such issues as the strategies used by MNEs from devel-

oped countries to overcome the resource deficiencies

in developing countries (Seelos & Mair, 2007). Further,

it cannot be used to analyze the international activities

of firms based in many developing and emerging coun-

tries—such issues as the strategies of firms in many devel-

oping and emerging countries to help reach their own

and developed markets (Aulakh, Kotabe, & Teegen, 2000;

Hoskisson, Eden, Ming Lau, & Wright, 2000).
Flores and Aguilera (2007) show that there is consid-

erable investment by US firms beyond the triad countries.

This point is emphasized in our empirical analysis as 25

firms on the Fortune 500 list in 2005, with a geographic

breakdown of sales information available, cannot be ana-

lyzed using Rugman and Verbeke’s (2004) system. The

Commonwealth Bank of Australia, for example, has all

its sales classified under Oceania and Other. It is classi-

fied as T2 using our system but has zero sales in the triad

and therefore cannot be classified using Rugman and

Verbeke’s (2004) system.

Second, patterns of international business evolve

over time in ways that are not captured within the triad

96 F E A T U R E A R T I C L E

Thunderbird International Business Review Vol. 57, No. 2 March/April 2015 DOI: 10.1002/tie

threshold excludes alternative patterns of globalization,

whereby firms consolidate within their home region (with

more than 50% of sales located there), and also have sales

throughout the world—but not more than 20% in any one

region. Ruigrok and van Tulder (1995) argue that MNEs

improve their global competitiveness by strengthening

their positions within their home triad or region.

Third, the 50% home-region orientated threshold

biases the system toward defining firms as home-region

orientated and away from the likelihood that any firm

is considered global. A firm classified as home-regional

could have up to 50% of its sales throughout the world,

making it a global firm. Alternatively, all of the sales of a

home-region orientated firm could in fact be in the firm’s

home country—in which case it would be a domestic

firm. This particular threshold is the main driver of the

triad analysis finding that most firms are home-regional,

as demonstrated by Osegowitsch and Sammartino (2008).

Osegowitsch and Sammartino (2008) perform five

robustness tests on Rugman and Verbeke’s (2004) find-

ings by altering the various thresholds in their system.

To carefully replicate Rugman and Verbeke (2004), Ose-

gowitsch and Sammartino (2008) used the Fortune 500

(2001) list. We perform a similar analysis on the Fortune

500 (2005). Our findings are reported in Table 4. We

include, first, the findings of Osegowitsch and Sammar-

tino (2008) on the Fortune list from 2001, and we then

present our replication of their results using the Fortune

list (2005). In the first set of tests, the 20% host-region

threshold is reduced to 15% and then 10%, while retain-

ing the 50% home-region threshold. As can be seen in

Table 4, this results in a shift of firms from biregional to

global. Reducing the threshold to 10%, for example, sees

21 biregional firms reclassified as global.

Next, we eliminate the 50% home-region threshold

and retain the 20% host-region threshold. Similar to the

results of Osegowitsch and Sammartino (2008), we find

a dramatic increase in the number of biregional firms.

We then eliminate the 50% home-region threshold and

reduce the host-region thresholds to 15% and 10%. The

number of global firms increases but remains relatively

few in number overall, but the number of biregional firms

again increases substantially. Our results confirm the find-

ings of Osegowitsch and Sammartino (2008)—that the

case for home regionalization is overstated, and the 50%

home-region threshold is driving Rugman’s conclusions.

ABHK’s system provides a more complete view of

each firm’s breadth of multinationality, and it allows

researchers to set their own thresholds if appropriate to

the context of the study. We suggest that any thresholds

imposed should be lower than those used by Rugman

many of the world’s largest firms tend to skip regionaliza-

tion and proceed directly to transregionalization. This

finding is worthy of further investigation by international-

ization theory builders and empirical researchers.

The Use of Thresholds

The ABHK multinationality classification scheme catego-

rizes firms based on the existence of sales or subsidiaries

in a particular region, rather than the quantity or pro-

portion—thresholds are not used. The use of thresholds

based on sales in these markets presents a highly blink-

ered view of a firm’s international activities. Three points

are worth noting in relation to the use of thresholds by

Rugman and his co-authors.

First, the use of thresholds creates empirical pitfalls

in that some firms cannot be classified using Rugman and

Verbeke’s (2004) system. Anglo American, for example,

has sales in all six regions of the world. It has 33% of

sales in Europe, 4% in Asia, 2% in North America, and

61% in other regions. The complex hurdles of Rugman

and Verbeke’s (2004) system mean that this company is

unclassifiable.

Second, the threshold applied to global firms as hav-

ing less than 50% of their sales in their home region and

at least 20% of their sales in each of the other two regions

of the triad limits the number of firms that are classified

as global. MNEs with a substantial proportion of sales in

their home (triad) regions—particularly the United States

(or North America)—are unlikely to achieve more than

20% of their sales in the other two regions. Further, this

The ABHK multinationality
classification scheme
categorizes firms based on
the existence of sales or
subsidiaries in a particular
region, rather than the
quantity or proportion—
thresholds are not used.

Are the World’s Largest Firms Regional or Global? 97

DOI: 10.1002/tie Thunderbird International Business Review Vol. 57, No. 2 March/April 2015

regional and global dimensions are critically important to

international strategy.

Rugman and his co-authors use industry-specific

examples to attempt to refute the validity of global strat-

egy. Using their sales data analysis to show that over 85%

of all North America’s cars are built there by “core triad”

firms, over 90% of cars produced in the EU are sold

there, and over 93% of Japan’s cars are built domestically,

Rugman and Hodgetts (2001) argue that the automobile

industry is “triad-based, not global” and that “there is

no global car” (p. 333). Closer inspection of the world’s

automotive industry, however, reveals that it is very much

global, and that car manufacturers need to have global

strategies. Cars are used in every country in the world.

While it is obviously the case that the triad MNEs are

the biggest producers, the typical car produced in any

of the triad regions, or anywhere else for that matter, is

essentially the assembly of many component parts pro-

duced through a complex global web of supply chains,

licensing, joint venturing, and subsidiaries across many

countries within and outside the triad, however defined.

The statement that there is no global car is a gross simpli-

fication that does not recognize the sophistication of the

industry’s manufacturers. Lampell and Mintzberg (1996)

and his co-authors. Osegowitsch and Sammartino (2008)

also advocate lower thresholds, particularly in the case

in which the researcher wishes to study the process of

internationalization over time. A firm might be rapidly

internationalizing by expanding sales and manufactur-

ing capacity throughout the world, but this trend would

not be picked up for years (if at all) using the Rugman

approach. The higher the threshold, the less likely these

sorts of interesting trends would be detected. ABHK’s sys-

tem can facilitate the study of the fast-changing, dynamic

nature of international business that we observe today

and will continue to observe in the future.

Implications for Firm Strategy

Geography matters in international business because

location is inextricably linked with climate, culture, law,

politics, and trade, and it is central to understanding the

behavior of people as producers and consumers of goods

and services along with the operation of institutions and

markets (Ronen & Shenkar, 1985). In classifying some of

the world’s largest firms using the classification scheme of

ABHK, we have seen that between the extremes of local

and global, there are few regional MNEs and many more

transregional MNEs. Our analysis suggests that the trans-

TABLE 4 Robustness Tests on the Fortune 500 Lists in 2001 and 2005

Home-Regional Biregional Host-Regional Global

Fortune 500 list (2001)

Rugman’s Classifi cation 320 (88) 25 (7) 11 (3) 9 (2)

15% Host Threshold 320 (88) 19 (5) 11 (3) 15 (4)

10% Host Threshold 320 (88) 11 (3) 11 (3) 24 (6)

No 50% Home Threshold 267 (73) 87 (24) 2 (0) 9 (3)

15% Host, No Home Threshold 232 (64) 114 (31) 1 (0) 19 (5)

10% Host, No Home Threshold 200 (55) 122 (33) 1 (0) 42 (12)

Fortune 500 list (2005)

Rugman’s Classifi cation 283 (81) 50 (14) 9 (3) 7 (2)

15% Host Threshold 283 (81) 40 (11) 9 (3) 17 (5)

10% Host Threshold 283 (81) 29 (8) 9 (3) 28 (8)

No 50% Home Threshold 246 (71) 92 (26) 4 (1) 7 (2)

15% Host, No Home Threshold 215 (62) 109 (31) 3 (1) 22 (6)

10% Host, No Home Threshold 187 (54) 114 (33) 2 (0) 46 (13)

Note: This table shows the categorization of the Fortune 500 fi rms for both 2001 and 2005, fi rst using Rugman’s classifi cation, and then altering Rugman’s
thresholds. The 2001 results are taken directly from Osegowitsch and Sammartino (2008), and we replicate Osegowitsch and Sammartino’s alterations to
thresholds using the Fortune 500 (2005) list. The fi gures show the number of fi rms in each category, and in parentheses the percentage of the fi rms in that
particular category. Rugman and co-authors’ classifi cation scheme works as follows. They use four categories: home-regional, biregional, host-regional, and
global. Home-regional fi rms have at least 50% of their sales in their home region, and biregional fi rms have less than 50% of their sales in any one region and
at least 20% in each of two triad regions. Host-regional fi rms have at least 50% of their sales in a triad region other than the home region, and global fi rms
have less than 50% of their sales in any one region and at least 20% in each of the three triad regions.

98 F E A T U R E A R T I C L E

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describe how modern customer-focused manufacturing

specifications have evolved from the more traditional

mass customization, Alford, Sackett, and Nelder (2000)

describe how this has been adopted within the auto-

mobile industry, and Humphry and Memedovic (2003)

document how the automobile industry expanded out-

side the triad during the 1990s into the strongly growing

emerging markets to offset the oversupply and stagnation

within the triad. In addition to these trends, the prices of

important components, such as chemicals, metals, plas-

tics, rubber, glass, and the prices of complementary prod-

ucts such as oil and petrol, ensure that car manufacturers

and component suppliers throughout the world need to

have a clear global strategy and vision that is influenced

and shaped by global issues such as climate change.

Rugman and Verbeke (2004, 2007) argue that firm-

specific advantages (FSAs) are largely bounded within the

firm’s home region and cannot easily be transferred across

regions through trading, forming alliances, or investing in

foreign subsidiaries. MNEs, they argue, tend to focus their

efforts within their home region, and they will expand

further afield—at considerably greater cost and risk—

only when these markets are exhausted. This conjecture,

however, although consistent with high-level international-

ization theory such as the process theory of internationaliza-

tion of Johanson and Vahlne (1977, 1990), is not supported

by a rigorous analysis of the data and an understanding of

its limitations. When the thresholds are reduced, when the

regions of the world are defined more comprehensively,

and when within-region patterns of international activity

are more carefully analyzed, the patterns of internation-

alization that emerge are not necessarily consistent with a

home-region focus. Rather, they are consistent with MNEs

expanding beyond their home regions long before they

have exhausted their home-region markets.

A l t e r n a t e R e g i o n a l G r o u p i n g s

In this section, we examine the robustness of our system

by reclassifying the Fortune 500 firms with available sales

data (374 firms) and subsidiaries data (455 firms), using

several alternative regional groupings. Table 5 presents

the main findings, with Panel A detailing classifications

based on sales and Panel B on subsidiaries. The first row

in Panels A and B presents the numbers for our classifica-

tion system. In the second, third, and fourth rows in each

panel, we reclassify the firms assuming that there are five

instead of six regions, by combining North and South

America, Asia and Oceania, and Europe and Africa,

respectively. The number of firms classified as domestic

and regional change little when the continents are aggre-

gated in this way. The major difference is that more are

classified as global and fewer transregional. In the fifth

row in each panel, we reclassify assuming a three-region

world: Africa/Europe, the Americas, and Asia/Oceania.

Clearly, the number of firms considered global increases

dramatically when there are three “mega-regions.” This is

at odds with Rugman (2003) and Rugman and Verbeke

(2004) because our regions include all countries in the

world and we do not apply thresholds in classifying our

firms within particular regional groupings.

The sixth and seventh rows in Panel B and the sixth

row in Panel A present the results of reclassifying the

Fortune 500 firms using Dunning et al.’s (2007) main

and alternate regional groupings. Dunning et al. divided

the world into six regions using a geographic clustering

originally proposed by Ronen and Shenkar (1985) and

Shenkar (2001): Anglo (Australia, Canada, Ireland, New

Zealand, South Africa, the United Kingdom, and the

United States), Latin European (Belgium, France, Italy,
Portugal, and Spain), Nordic and Germanic (Austria,

Denmark, Finland, Germany, the Netherlands, Norway,

Sweden, and Switzerland), Latin American (Argentina,

Brazil, Chile, Colombia, Mexico, Peru, and Venezuela),

Far Eastern (China, Hong Kong, India, Indonesia, Japan,

Korea, Malaysia, Singapore, the Philippines, Taiwan, and

Thailand), and Other (all other countries). We use this
system with the subsidiary data (row 7 of Panel B). While

the Dunning et al. system is an intuitive approach that

encompasses elements of cultural and psychic distance,

it has the disadvantage that it cannot be used at the firm

level to classify by multinationality based on sales because

most firms do not report sales or other accounting data

in sufficiently fine geographic detail. For this reason, we

also use Dunning et al.’s (2007) alternate four regions—

the Americas, Europe, Asia, and Other—to reclassify the

Fortune 500 based on both sales and subsidiaries (row 6

of Panels A and B).

Clearly, the number of firms
considered global increases
dramatically when there are
three “mega-regions.”

Are the World’s Largest Firms Regional or Global? 99

DOI: 10.1002/tie Thunderbird International Business Review Vol. 57, No. 2 March/April 2015

TABLE 5 Robustness Analysis Based on Geographic Regions

D R T G Total

Panel A: Based on Sales Data

1: Our six-region system
Africa, Asia, Europe, North America, South America and Oceania 53 8 285 28 374

2: Five-region system
Africa, Asia, the Americas, Europe, Oceania (North and South America merged) 53 9 273 39 374

3: Five-region system
Africa, Asia/Oceania, North America, South America, Europe (Asia and Oceania merged) 53 8 236 77 374

4: Five-region system
Africa/Europe, Asia, North America, South America and Oceania (Africa and Europe merged) 53 8 246 67 374

5: Three-region system
Africa/Europe, the Americas and Asia/Oceania 53 9 80 232 374

6: Dunning et al.’s (2007) alternative regions
The Americas, Europe, Asia, Other 53 9 185 127 374

Panel B: Based on Subsidiary Data

1: Our six-region system
Africa, Asia, Europe, North America, South America and Oceania 47 28 277 103 455

2: Five-region system
Africa, Asia, the Americas, Europe, Oceania (North and South America merged) 47 30 268 110 455

3: Five-region system
Africa, Asia/Oceania, North America, South America, Europe (Asia and Oceania merged) 47 28 249 131 455

4: Five-region system
Africa/Europe, Asia, North America, South America and Oceania (Africa and Europe merged) 47 28 223 157 455

5: Three-region system
Africa/Europe, the Americas, and Asia/Oceania 47 30 80 298 455

6: Dunning et al.’s (2007) alternative regions
The Americas, Europe, Asia, Other 47 30 157 221 455

7: Dunning et al.’s (2007) six regions
Anglo, Latin European, Germanic/Nordic, Latin American, Far Eastern, Other 47 25 225 158 455

Note: This Table classifi es the Fortune 500 fi rms in 2005 for which we have sales and subsidiary data, using several alternate regional groupings. The
columns titled “D”, “R”, “T”, and “G” denote the categories of multinationality as domestic, regional, transregional, and global. Panel A details the num-
ber of fi rms in each regional grouping category based on sales data, and Panel B does likewise for the subsidiary data.

As can be seen in Panel B of Table 5, the number of

firms classified as domestic and regional is similar when

Dunning et al.’s (2007) six-region system is compared

with ours, except that the Dunning system classifies more

firms as global and fewer as transregional. This difference

is explained by Dunning et al.’s (2007) “Other” region,

which is a large and diverse 155- country grouping, and

also by the fact that three of their regions capture Euro-

pean countries. These quirks of the Dunning et al. sys-

tem throw up a few anomalies when using it at the firm

level. For example, a firm with subsidiaries throughout

Europe and in South America and Asia would be classi-

fied as global, and a firm with subsidiaries in Belgium,

Germany, Luxembourg, and the United Kingdom would

be classified as transregional even though all of its subsid-

iaries are in Europe.

S u m m a r y a n d C o n c l u s i o n s

In this article we have provided an alternative perspective

on the regional-global debate. Using the classification

scheme of Aggarwal et al. (2011), we have classified two

samples of firms: 1,289 G7 firms as well as the 2005 For-

tune 500 firms. We have shown that both samples contain a

wide variety of firms, ranging from domestic corporations

to global MNEs, with most being transregional. Contrary

to proponents of the triad analysis—who have argued that

most Fortune 500 firms are regional rather than global—

100 F E A T U R E A R T I C L E

Thunderbird International Business Review Vol. 57, No. 2 March/April 2015 DOI: 10.1002/tie

we find that many of these firms, as well as our larger data

set of 1,289 G7 firms, are in fact transregional and global.

Further, the vast majority of firms do not fully penetrate

their home region. Very few are active in more than one-

third of countries in their region, and our findings are

consistent with a pattern of internationalization whereby

firms expand beyond their home region long before they

have exhausted more geographically close markets. Con-

trary to the recommendation of Rugman and co-authors

that firms should think home-regionally, our analysis sug-

gests that transregional and global dimensions are criti-

cally important to international strategy.

A further conclusion to emerge from our analysis is

that the IB literature needs a strong and robust classifica-

tion system for firm-level multinationality in order to pro-

vide clarity on the regionalization/globalization debate.

While we argue in favor of the use of the ABHK model,

it is not without its limitations. One such limitation is

the restrictiveness of the system in classifying firms. For

example, a firm must have sales and subsidiaries in all six

regions of the world to be classified as global. Therefore,

if a firm has sales and subsidiaries in Europe, North Amer-

ica, South America, Asia, and Oceania but not Africa, it is

classified as transregional rather than global. Our robust-

ness analysis in the preceding section details the impact

on results when alternative geographic regions within

this six-region system are combined. We see this as a first

step in considering alternative classification systems and

recommend this as a useful avenue for future research.

N o t e s

1. De Backer and Yamano (2008) describe how trade has outpaced
world growth since the 1980s; UNCTAD (2007) discusses how FDI
has accelerated since the 1990s; and De Backer and Yamano (2008)
describe the increasingly global production networks and supply chains.

2. Peng and Pleggenkuhle-Miles (2009) review the literature on global
versus regional diversification in the context of a larger set of debates
about global strategy.

3. Rugman and Verbeke (2003, 2004), for example, analyze 364 firms
from the Fortune 500 list.

4. For example, Rugman and Girod (2003) refer to the triad as com-
prising the United States, the EU, and Japan (p. 28 and Table 5), and
they later refer to the triad as comprising NAFTA, Europe, and Asia (p.
29 and Table 6). These alternative regional groupings are potentially
very different, and no details of constituent countries are provided.
Rugman and Verbeke (2004) refer to the triad as comprising North
America, the EU, and Asia (p. 3), but they present their analysis of the
“broad triad” comprising NAFTA, the expanded EU, and Asia (p. 5).
They do not clarify what countries are in the latter two regions.

5. Eight firms are host-region orientated, 16 are biregional, and 86 are
home-region based.

6. Africa and South America include all countries on these continents.
Asia includes the Middle East, the Russian Federation, and Turkey;
Europe includes countries as far east as Armenia, Azerbaijan, Belarus,
and Ukraine; North America includes Canada, Mexico, the United
States, and the Central American countries; and Oceania comprises
Australia, New Zealand, and the Pacific islands.

7. Twenty-five of our 374 firms cannot be classified using Rugman’s system.

8. They are 3M, Air France–KLM, Anglo American, AREVA, AstraZen-
eca, BAE Systems, BHP Billiton, Boeing, Bouygues, British Airways,
British American Tobacco, Cemex, Fonciere Euris, General Dynamics,
Hochtief, Hutchison Whampoa, JPMorgan Chase, Lufthansa, MAN
Group, Merrill Lynch, Nestlé, Nike, Novartis, PPR, Rio Tinto Group,
Roche Group, Société Générale, and Volkswagen.

9. The British firm Anglo American has 33% of sales in Europe, 3.6%
in Asia, and 1.8% in North America. Another British firm, Rio Tinto,
has 30.8% of sales in North America, 3.4% in Asia, and 1.4% in Europe.
As a result, neither firm can be classified using Rugman’s thresholds.

Jenny Berrill is assistant professor at the School of Business at Trinity College Dublin, Ireland. She holds a BA
degree in economics and fi nance and a master’s degree in economics and fi nance from the National University of
Ireland (NUI), Maynooth. She holds a PhD degree in international business and fi nance from Trinity College Dublin.

Her research interests are in the area of multinational companies and their role in the international diversifi cation of

portfolios, the regionalization/globalization debate, and industrial versus international portfolio diversifi cation. She
has published articles in the Journal of Economics and Business, International Business Review, and Research in
International Business and Finance.

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online
DOI: 10.1080/10978526.2014.871214

Received December 27, 2012; revised June 18, 2013; accepted June 26, 2013.
Address correspondence to Verónica Baena, European University of Madrid, Calle Tajo,

s/n. Urb. El Bosque, s/n. 28670-Villaviciosa de Odón (Madrid), Spain. E-mail: veronica.baena@
uem.e

International Franchising Decision-Making:
A Model for Country Choice

VERÓNICA BAENA
Department of Business Administration, European University of Madrid, Madrid, Spain

JULIO CERVIÑO
Department of Business Economics, University Carlos III of Madrid, Madrid, Spain

ABSTRACT. The present study examines how a number of market
conditions may drive diffusion of franchising. It considers a sam-
ple of 63 Spanish franchisors operating through 2321 franchisee
outlets across 20 different Latin American countries: Argentina,
Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic,
Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico,
Nicaragua, Panama, Paraguay, Peru, Puerto Rico, Uruguay, and
Venezuela in January 2011. Results conclude that geographical
and cultural distance between the host and home country, as well
as the level of the host country’s uncertainty avoidance, individu-
alism, political stability, unemployment rate, market potential, and
efficiency of contract enforcement, may drive the spread of inter-
national franchising. Results reinforce previous research on coun-
try choice as to the association between international franchising
and the host country’s unemployment rate and cultural distance,
but also identify differences from other regions in some issues such
as political stability. Moreover, new insights relative to the effect of
market potential, individualism, uncertainty avoidance, and the
efficiency of contract enforcement on international franchise dif-
fusion are also shown.

RESUMEN. El presente trabajo examina el efecto que ciertas car-
acterísticas del mercado receptor pueden tener en la difusión inter-
nacional del sistema de franquicia. Se ha analizado una muestra

14 V. Baena and J. Cerviño

de 63 cadenas franquiciadoras españolas que en enero de 2011
operaban a través de 2.321 puntos de venta en 20 países latino-
americanos: Argentina, Brasil, Chile, Colombia, Costa Rica, Cuba,
República Dominicana, Ecuador, El Salvador, Guatemala, Haití,
Honduras, México, Nicaragua, Panamá, Paraguay, Perú, Puerto
Rico, Uruguay y Venezuela. Los resultados concluyen que la dis-
tancia geográfica y cultural entre el país de origen y el receptor
de la inversión, así como el nivel de aversión al riesgo, individu-
alismo, estabilidad política, tasa de desempleo, potencial de mer-
cado y la eficiencia de la ejecución de contratos del país receptor
inciden en la expansión internacional del sistema de franquicia.
Estos resultados son consistentes con la literatura sobre la relación
existente entre la expansión de la franquicia y la tasa de desem-
pleo del país receptor, así como la distancia cultural entre el país
inversor y el receptor de la inversión. Sin embargo, este estudio
identifica diferencias con trabajos anteriores en algunos aspec-
tos como el papel de la estabilidad política del mercado receptor.
Asimismo, resultan novedosas las aportaciones realizadas sobre el
efecto del potencial de mercado, individualismo, aversión al riesgo
y la eficiencia de la ejecución de contratos del país receptor sobre
la difusión internacional del sistema de franquicia.

RESUMO. O presente trabalho examina como uma série de
condições de mercado podem impulsionar a difusão do sistema
de franquias. Avalia uma amostra de 63 franqueadores espan-
hóis que operavam 2.321 pontos de venda em 20 países latino-
americanos (Argentina, Brasil, Chile, Colômbia, Costa Rica,
Cuba, República Dominicana, Equador, El Salvador, Guatemala,
Haiti, Honduras, México, Nicarágua, Panamá, Paraguai, Peru,
Puerto Rico, Uruguai e Venezuela) em janeiro de 2011. Os resul-
tados indicam que a distância geográfica e cultural entre o país
de origem e o receptor do investimento, assim como o nível de
aversão ao risco, individualismo, estabilidade política, índice
de desemprego, potencial de mercado e obrigatoriedade do cum-
primento dos contratos, pode levar à difusão internacional do
sistema de franquias. Os achados reforçam pesquisas anteri-
ores sobre escolha do país como uma combinação entre a fran-
quia internacional e o desemprego e a distância cultural do
país anfitrião, mas identificam diferenças em relação a outras
regiões, quanto a algumas questões tais como a estabilidade
política. Também são apresentadas percepções sobre o efeito do
potencial de mercado, individualismo, aversão ao risco e obriga-
toriedade do cumprimento de contratos, na difusão internacio-
nal do sistema de franquias.

International Franchising Decision-Making 15

KEYWORDS. country choice, franchising, international strategy,
Latin America, transaction cost theory

INTRODUCTION

Franchising is an organizational model where local entrepreneurs, termed
franchisees, are granted the right to operate one or multiple units of the
franchise chain at a location by investing their own funds. In return, the
franchisee pays the franchisor a royalty based on gross sales. Profits after
expenses (including royalties) are received by the franchisee as compensa-
tion (Elango, 2007). However, it is also viewed as a strategic business model
that empowers its associates and significantly impacts the surrounding eco-
nomic environment (Spinelli, 2007).

The literature on franchising has fully covered issues such as why firms
should organize as a franchise chain and engage franchisees (Lafontaine &
Kaufmann, 1994; Alon, 2001, 2005), franchising efficiency (Lafontaine, 1992),
and the relationship between franchisor and franchisee (Sanders, 2002). In
contrast, although recently greater effort has been made to examine the
scope of franchising from an international standpoint, international franchis-
ing has generally received limited academic attention (Alon, 2010; Quinn &
Doherty, 2000). Moreover, the scant theoretical and empirical attention given
to this topic has generally been examined from a U.S. and British base. Thus,
there is a great need for a deeper explanatory model of international diffu-
sion via franchising, one that can explore this issue by focusing on franchis-
ing systems other than those from the United States or Great Britain.

The present study attempts to cover this gap by introducing a model
that explores a set of host country drivers of franchise diffusion among Latin
American nations. According to an annual report launched by Economic
Commission for Latin America and the Caribbean (ECLAC) (in December
2011), Latin American nations will grow by 5% in 2012 thanks to the
economic recovery posted by most countries in the region. Specifically,
it is expected that South American gross domestic product (GDP) will
grow by 6%, while GDP will rise by 4% in Mexico and Central America
in 2012. Therefore, while franchising in the United States, Canada, and
parts of Western Europe has reached domestic market saturation (Alon,
2010), Latin American markets remain relatively untapped. Nevertheless,
research in international marketing in the Latin American context is very
limited (Birnik & Browman, 2007; Fastoso & Whitelock, 2010). This is
surprising given the substantive economic importance of the region with
a population over 550 million and a GDP of approximately US$4 trillion.
Additionally, most Latin American countries, including the largest ones
(Argentina, Mexico, Brazil, Chile, Peru, Venezuela, and Colombia), had a
greater per capita GDP than China did in 2010. As of 2011 Latin America

16 V. Baena and J. Cerviño

included five nations classified as high-income countries: Chile, Mexico,
Argentina, Uruguay, and Panama.

This research sets out to go beyond the traditional analysis of interna-
tional market selection in developed countries by further exploring this issue
in the Latin American context. We focus on the Spanish franchise system. In
this sense, it is worth mentioning that since the mid-1990s Spain has been the
second biggest foreign investor in Latin America; second only to the United
States (Toral, 2008). However, scant literature has addressed the question of
international franchising in Latin America (Baena, 2013). Previous research
has tended to focus on a single sector such as retailing, manufacturing, or
hospitality (see, e.g., Aliouche & Schlentrich, 2011; Alon & McKee, 1999;
Doherty, 2007; Elango, 2007; Moore, Doherty, & Doyle, 2010) while this
study seeks to advance understanding by encompassing 52 different busi-
ness sectors (see Appendix). Moreover, over the past decade, the relevance
of the Spanish franchise system has grown. Since 2008 it has been ranked
fifth worldwide both in terms of the number of franchisors (1019) and the
quantity of franchisee outlets (65,026). These exist in 112 foreign countries
through 172 chains with a total of 10,186 outlets in early 2011.

The present study explores the factors affecting international expan-
sion into Latin America via franchising. More specifically, it examines the
effect of a set of variables regarding country choice decision that have been
identified in previous research (list authors) These include geographical and
cultural distance between the host and home country, uncertainty avoidance,
individualism, political stability, unemployment rate, and level of a country’s
economic development. The effect of the host country’s market potential and
corruption has also been considered. These will be our contributions.

The rest of the article proceeds as follows. The second section explains
the conceptual model and presents the hypotheses. The third section dis-
cusses the empirical analysis and describes the results. Finally, we describe the
implications of these findings for practitioners and researchers, point out the
main limitations of the study, and recommend avenues for further research.

LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT

Several theories about international expansion provide the theoretical back-
ground that contributes to an understanding of the internationalization of
firms. Most notably we can point to the Uppsala model as well as Agency
theory and the importance of Transaction Cost theory.

Specifically, according to the Uppsala model the flow of information
between the firm and the market are crucial in the internationalization pro-
cess. Johanson and Wiedersheim-Paul’s (1975) study served as the basis of
subsequent research of the internationalization process (Buckley & Ghauri,
2004). The seminal article in this tradition was published by Johanson and

International Franchising Decision-Making 17

Vahlne (1977) who argued that the process of internationalization unfolds as a
sequence of stages, where firms gain experience stepwise, build management
competence, and reduce uncertainty in order to incrementally increase invest-
ments in target markets. Since knowledge is developed gradually, international
expansion takes place incrementally (Johanson & Vahlne, 2003). Nevertheless,
the Uppsala model has often been misunderstood. Specifically, Johanson and
Vahlne (2006) emphasized that this model is not “the establishment chain,”
going from ad hoc exports to the establishment of manufacturing subsidiar-
ies. The model addresses learning and commitment building and the interplay
between knowledge development and increasing foreign market commitments.

Agency theory (Fama & Jensen, 1983; Jensen & Meckling, 1976), another
theoretical framework that is frequently applied in relation to internation-
alization, seeks to explain the relationship between the principal (owner
of the company) and the agent (subsidiary’s manager). Specifically, it illus-
trates how parties enter and fulfill contracts governing this relationship. This
focus is particularly useful when studying franchising, since it recognizes the
existence of two parties (principal and agent) who may have certain diver-
gent interests. Specifically, the principal (franchisor) delegates to the agent
(franchisee) certain tasks for which the former lacks the necessary skills,
resources, or time. However, this does not mean that the agent will neces-
sarily perform the tasks in question in the way that best suits the principal.
In fact, the contrary can very often be the case. The franchisee is more likely
to pursue his or her own interests (Garg & Rasheed, 2006). Nonetheless,
despite the problems mentioned previously, agency theory defends franchis-
ing as a means of international expansion, since the franchisee has more
incentives to maximize his or her efforts under this than any other type of
business expansion system (Combs & Ketchen, 1999).

The third most commonly applied theory in explaining international
franchising is Transaction Cost theory (Alon, 2010; Baena, 2012; Burton,
Cross, & Rhodes, 2000;). Transaction cost analysis is an application of busi-
ness concepts defended by Coase (1937) and Williamson (1975). It views
companies as efficient agents (Chang & Rosenzweig, 2001) who subcontract
activities that external agents are able to provide at less cost than if per-
formed in-house. This perspective has been used on numerous occasions to
analyze franchising and, more specifically, the reasons for both its interna-
tional expansion (Elango, 2007; Michael, 2003; Sashi & Karuppur, 2002), and
new-market entry mode selection (Burton et al., 2000). That is, while Agency
theory (Fama & Jensen, 1983; Jensen & Meckling, 1976) is generally applied
to explain the relation between franchisor and franchisees, Transaction Cost
theory is the framework most commonly used to explain the international
franchise expansion phenomenon (Hennart, 2010; Sharma & Erramilli, 2004).

Moreover, Transaction Cost theory offers a rich framework for examin-
ing the efficiency of franchising. In particular, it posits that firms choose to
internalize or externalize exchange relationships based primarily on costs

18 V. Baena and J. Cerviño

incurred during the exchange process (Liang, Musteen, & Datta, 2009). This
framework asserts that franchising is a hybrid organizational form, located
somewhere between the extremes of vertical integration on the one hand,
and completely independent operations on the other. For the franchisor,
this agent-principal relation will appreciably impact the success or failure of
foreign market entry by using a particular organizational form (Burton et al.,
2000). Therefore, a set of interdependent transaction costs associated with
franchising-out into host markets can be envisaged:

• uncertainty about the future state of the environment coupled with the
limited ability of decision makers to process information;

• bounded rationality—the rationality of individuals is limited by the infor-
mation they have, their cognitive limitations, and the finite amount of time
they have to make decisions; and

• a small number of buyers or suppliers prone to opportunistic behavior.

In this sense, it is worth mentioning that uncertainty or bounded ratio-
nality taken by themselves are not a problem, but in conjunction they make
it impossible or costly to identify future contingencies and specify, ex ante,
appropriate ways to solve these contingencies. This problem is even worse
if agents are willing to act opportunistically when given the chance. All
these issues give rise to transactions costs (Zou, Taylor, & Cavusgil, 2005).
Consequently, as stated in Williamson (1975), an interdependent set of trans-
action costs associated with franchising-out into host markets can be defined
as (i) monitoring costs; (ii) researching costs to identify and evaluate poten-
tial franchise buyers in the target market; (iii) property right protection costs
to forbid contracted parties from operating a similar business in a given ter-
ritory and/or time once the agreement finishes; and (iv) servicing costs to
transfer the franchisor’s technology and know-how to franchisees.

Based on the previous discussion, we develop a framework based on
Transaction Cost Analysis (TCA) to infer the variables constraining interna-
tional franchising expansion, and apply them to Latin American markets on
a country level perspective.

Geographical Distance

Multinational companies tend to internationalize through country markets
that are more easily understood by managers (Rahman, 2003). According
to this point, Fladmoe-Lindquist (1996) posed the problem of geographical
distance from the standpoint of efficiency by showing that under geographi-
cal distance monitoring activities are more difficult and expensive. In other
words, the cost of monitoring is likely to be high when the unit is physically
removed from the franchisor (Rubin, 1978). Furthermore, geographical dis-
tance makes logistical support more difficult, especially when inputs have to
be imported from the home country.

International Franchising Decision-Making 19

The previously mentioned costs are substantially higher in foreign mar-
kets that span continents and time zones, despite recent improvements in
transportation and communication technology. Under these conditions, fran-
chising may help to prevent moral hazard and adverse selection1 without
requiring site visits and their accompanying travel difficulties, as well as the
need for regional monitoring facilities in global markets (Sashi & Karuppur,
2002). Firms can then reduce monitoring costs by involving local partners as
franchisees in distant markets. Nevertheless we can also argue the opposite
effect. This is because as spatial distance increases, however, so will transac-
tion costs. Search costs may increase because franchisors need to expend
greater resources to identify and contract with acceptable candidates for
franchisees. Moreover, servicing costs may increase if elements of the fran-
chise package need to be transported from the home country to the host
country (Burton et al., 2000). Following the previous discussion, we propose
the following:

Hypothesis 1
a
: The expansion of franchising across Latin American

nations will be positively associated with greater geographical distance
between the home and the host country.

Hypothesis 1

b
: The expansion of franchising across nations will be

negatively associated with greater geographical distance between the
home and the host country.

Cultural Distance

A key issue in internationalization is the need to adapt to cultural characteris-
tics (Sakarya, Eckman, & Hyllegard, 2007). Culture, defined as the standards
of beliefs, perceptions, evaluation, and behavior shared by the members of a
social group, strongly influences the behavior of firm’s consumers (Rahman,
2006). Traditionally, this variable has been addressed by the literature given
that it is well known that differences between markets in cultural values hin-
der the transfer of management skills and a company’s products and services,
This leads to higher transaction costs within an organization (Anderson &
Gatignon, 1986).

As reported in Fladmoe-Lindquist and Jacque (1995), franchising is
more likely in countries that are culturally distant from the home country.
Consequently, when cultural distances are small, firms may adopt the same
mode of operation as in domestic markets, and only firms that franchise
in the domestic market may prefer to do the same in the global market. In
contrast, when cultural distances are significant even firms that favor high
ownership arrangements in domestic markets may prefer adopting low own-
ership agreements in global markets (Alon & McKee, 1999). Furthermore,
companies operating globally will have to understand the complexity of dif-
ferent cultures in order to set standards for control and evaluation. Otherwise,

20 V. Baena and J. Cerviño

firms would transfer the responsibility for such decisions to local partners,
who will be able to set standards based on local practices and regulations
to evaluate the performance of the business and its employees (Sashi &
Karuppur, 2002).

On the basis of the preceding arguments, we can argue that franchis-
ing may be chosen when cultural distance is significant as it allows franchi-
sors to transfer responsibility for managing local operations to franchisees.
However, we can also postulate the opposite effect because as cultural dis-
tance increases, transaction costs may increase if elements of the franchise
package need tailoring to accommodate local market conditions (Eroglu,
1992). Furthermore, monitoring costs are likely to increase if differences in
business ethics and practices between the franchisor and franchisee become
more pronounced, rendering it less easy (or more costly) to ensure the sat-
isfactory performance of the latter (Burton et al., 2000). In relation to Latin
America, one might argue that countries are in the same or a similar cultural
cluster. However, following Hofstede (1980, 2001), it is clear that there are
still major cultural differences among Latin American countries that can be
analyzed and compared among themselves and to other third-world coun-
tries. Therefore, we propose the following:

Hypothesis 2
a
: The expansion of franchising across nations will be posi-

tively associated with greater cultural distance between the home and
the host country.

Hypothesis 2
b
: The expansion of franchising across nations will be

negatively associated with greater cultural distance between the home
and the host country.

Uncertainty Avoidance and Individualism

Hofstede’s research (1991) has revealed that cultures differ on four differ-
ent dimensions: (1) tolerance for ambiguity or uncertainty avoidance; (2)
power distance; (3) individualism/collectivism; and (4) masculinity. All of
them were calculated for different countries and have been amply cited in
the literature (Mitra & Golder, 2002).2

Related to the previous descriptions, entrepreneurs from cultures high
in uncertainty avoidance (low tolerance for ambiguity) might be more likely
to adopt franchising because of their lack of willingness to take calculated
risks. Specifically, franchising has been traditionally considered as a method
of economic development that reduces entrepreneurial risk by transferring
a proven retail concept as well as management and marketing expertise
(Michael, 2003). Nevertheless, franchising does not eliminate all business
risks. In addition, people that scored high in uncertainty avoidance may pre-
fer rules and structured circumstances rather than emotions and innovation.
Consequently, it could be argued that local agents showing high uncertainty

International Franchising Decision-Making 21

avoidance prefer being employees rather than franchisees, which would hin-
der the expansion of franchising across nations.

Related to individualism, cultures that favor individual achievement
tend to reward competition. Specifically, people with individualistic values
are more likely to develop organizational strategies based on entrepreneur-
ship, such as franchising (Hoffman & Preble, 2001). That is, instead of being
hired as an employee, an individualistic agent may opt for buying a fran-
chise as this format allows the franchisee to manage his or her own business
in a specified manner for a certain period of time by paying an initial fee
and periodical royalties (Brookes & Altinay, 2011). This would increase the
expansion of franchising across nations with highly individualistic national
cultures. However, although franchising provides flexibility to franchisees,
some elements of the marketing mix (i.e., brand name, products, and busi-
ness system) are standardized by the franchisor across global markets (Sashi
& Karuppur, 2002). Therefore, we could also argue that individualist people
may prefer opening their own business from scratch rather than becoming a
franchisee and being subjected to the franchisor’s rules. Hence, based on the
previous discussion we make the following propositions:

Hypothesis 3
a
: The expansion of franchising across nations will be posi-

tively associated with national cultures high in uncertainty avoidance.
Hypothesis 3

b
: The expansion of franchising across nations will be

positively associated with national cultures low in individualism.

Hypothesis 4

a
: The expansion of franchising across nations will be

positively associated with national cultures high in individualism.
Hypothesis 4

b
: The expansion of franchising across nations will be
positively associated with national cultures low in individualism.

Political Stability

Political uncertainty can lead to frequent changes in industrial and eco-
nomic policies and can increase the risk of performing business operations
in a country. In particular, different organizational forms may be employed
depending on the degree of political uncertainty (Alon & McKee, 1999).

Frequent changes in government policies may require firms to fre-
quently alter their practices. For instance, policies relating to the use and
legal protection of foreign brand names or imported raw materials may
be changed. The modifications required as a consequence of complying
with local regulations may be affected easily by involving local franchi-
sees. Therefore, when the degree of political instability is high, many stud-
ies emphasize franchising as the optimal choice for international expansion
because it requires a more limited resource commitment and allows firms
to reduce the uncertainty exposure of the foreign-bound firm. The change
of ownership of Zara Venezuela (Inditex Group) is a clear example. Zara

22 V. Baena and J. Cerviño

entered Venezuela in 1998 and by the end of 2007 had 21 wholly owned
stores. Increasing political instability in the country combined with a grow-
ing aversion to Spanish interest on behalf of the government—especially
following King Juan Carlos I of Spain’s “Why don’t you shut up!” to President
Hugo Chavez during the closing session of the Ibero-American summit in
Chile 2007—encouraged Zara to sell its 21 stores to a local company and to
establish a master franchise agreement.

Nevertheless, we can also argue the opposite effect. This is because
political instability may affect import restrictions or the remittance of royal-
ties to the home country, significantly influencing the profitability of the
foreign operation (Fladmoe-Lindquist, 1996). As a consequence, franchisors
may avoid expanding their business to foreign nations suffering from politi-
cal instability. Colombia must be considered as a case in this respect. Years of
violence and political instability had severely affected the growth of foreign
investment and the development of modern retailing. However, Colombia
has witnessed a remarkable turnaround since 2002 by significantly decreas-
ing the levels of violence and political risk—so much so that tourism is now
a flourishing industry and foreign direct investment is once again grow-
ing. This new and promising situation is motivating franchise retail chains
that once left the country to come back, as was the case of Office Depot
which reentered the country in 2009. In addition, new businesses are estab-
lishing new operations, such as the new Marriott hotel in Bogota, owned
by an El Salvador-based firm and managed under a franchise agreement.
During these past few years, major Spanish franchisors entered the coun-
try, such as Retoucherie de Manuela, Artesanos Camiseros, Pressto, Mango,
and Imaginarium. Zara opened its first store at the end of 2008 as a wholly
owned operation, opening two new stores in 2009 under the Massimo Dutti
and Bershka brand names. Thus, we propose the following:

Hypothesis 5
a
: The expansion of franchising across nations will be posi-

tively associated with countries high in political stability.
Hypothesis 5

b
: The expansion of franchising across nations will be

positively associated with countries low in political stability.

Unemployment Rate

Among economic factors, we assume potential entrepreneurs attempt to
maximize net benefits regarding their livelihoods. Individuals become entre-
preneurs and franchisees when their utility (including but not limited to
monetary rewards) is maximized. That is, the greater the expected utility
of being a franchisee, the more individuals will be attracted to franchising
(Alon & McKee, 1999).

More specifically, as the opportunity cost gets higher, the attractiveness
of being a franchisee declines. On the contrary, as the opportunity cost falls,

International Franchising Decision-Making 23

the attractiveness of being a franchisee rises (Michael, 2003). For this deci-
sion, opportunity cost means the wages and other benefits associated with
alternative forms of employment, where alternatives to being a franchisee
may be working for a wage, or being self-employed in an independent busi-
ness. As a consequence, franchising may be considered as an alternative to
other employment because, as remarked in previous literature, individuals
may be “pulled” or ”pushed” out of wage labor and into entrepreneurship
(see, e.g., Cooper & Gimeno, 1992).

Nevertheless, we could also predict the opposite effect. This is because
unemployed people may not be willing to spend their savings in order to be
self-employed in an independent business that, as with all types of invest-
ment, carries some level of risk. Furthermore, the unemployed may find
more difficulties in finding the necessary resources to start up the new busi-
ness, especially if they require medium- or long-term financing. As a result, it
could be argued that unemployed people prefer looking for a new job rather
than being a franchisee. So, based on the previous discussion we propose:

Hypothesis 6
a
: The expansion of franchising across nations will be posi-

tively associated with countries that have high unemployment rates.
Hypothesis 6

b
: The expansion of franchising across nations will be

positively associated with countries that have low unemployment rates.

Economic Development

Host market economies may be one of the most important explanatory fac-
tors in a country’s attractiveness and in market selection. It also constitutes a
primary driver for company expansion into foreign markets (Sakarya et al.,
2007).

The importance and the need for systematically evaluating and select-
ing foreign markets’ economic development has been stressed by many
researchers as it is critical for the future success of a business (Rahman,
2006). In particular, since franchising is dominated by services or products
associated with branding and services, the importance of a viable host econ-
omy to pay for services or differentiated products is crucial to the growth of
business activity via franchising (Baena, 2009). Additionally, greater market
potential is associated with business growth, given that consumers living in
those markets can generally afford to pay for services or products rather than
perform them themselves (Rahman, 2003).

In short, as economies become more affluent, there is a greater shift
to services, which, as shown by Hoffman and Preble (2001), provide more
opportunities for firms to expand. Moreover, countries high in economic
development usually present less exposure to political and economic risk
(Herrmann & Datta, 2002) and thus the number of franchisors willing to enter
them increases (Alon, 2010). Peru may be a good example of this situation.

24 V. Baena and J. Cerviño

Although the concept of franchising started in Peru in 1979, with the open-
ing of the first Kentucky Fried Chicken in Lima, the economic circumstances
during the 1980s and 1990s did not favor the development of franchising
in the country. Compared to other countries in the region, Peru has a very
low relative percentage of franchise stores in its market. Since the middle
of the last decade, the country has experienced unprecedented economic
growth and political stability. The franchise business has also enjoyed rapid
and significant growth over the past few years. Leading Spanish brands such
as Mango, Women’s Secret, Springfield, Imaginarium, and Sun Planet have
recently established themselves in the country through local franchisees.

Nevertheless, we could also predict the opposite effect. This is because
expanding across foreign countries via franchising entails several advantages
for the franchisor as fewer financial resources are required and susceptibil-
ity to political, economic, and other risks are reduced (Quinn & Doherty,
2000; Welsh, Alon, & Falbe, 2006). However, profits are shared with the
local agent—franchisee. As a result, companies entering into markets show-
ing greater market potential and business growth may be willing to expand
their business abroad by using their own resources (joint venture or 100%
direct investment) and ultimately claim all of the profits. For instance, many
Spanish franchisors entered Chile, Argentina, and México during the middle
of the 1990s via wholly owned operations instead of franchising agreements.
Based on the previous arguments we make the following propositions:

Hypothesis 7
a
: The expansion of franchising across nations will be posi-

tively associated with countries high in economic development.
Hypothesis 7

b
: The expansion of franchising across nations will be

positively associated with countries low in economic development.

As a result, it consists of a set of country variables that are supposed
to constrain franchisers seeking to target their franchises internationally.
Figure 1 summarizes the proposed model.

METHODOLOGY

Sample and Data Collection

Data on international franchising activity were obtained from the Spanish
franchise system, which as of 2008 ranked fifth worldwide in terms of both
the number of franchisors and the quantity of franchisee outlets. To test
the hypotheses, information about Spanish franchising in Latin America was
obtained by contacting the Spanish Franchise Association, and the main
Spanish franchising Consultant Group: Tormo & Asociados. We also consid-
ered several studies published in the press as well as the webpages of the main
Spanish franchise chains and the most important international franchising

International Franchising Decision-Making 25

associations (International Franchise Association, Global Franchise Network,
etc.). We finally obtained data on 2321 outlets established by 63 Spanish
franchise chains doing business across 20 Latin American nations3 in early
2011. Moreover, instead of focusing on a single sector of activity as in previ-
ous studies (Alon, 2001; Doherty, 2007), the present study focuses on the
entire Spanish franchise system, which includes 52 business sectors (see
Appendix).

In this sense, it is important to point out that databases created with
information from secondary sources have previously been used in studies
on franchising (Alon, 2001; Baena, 2009). Even though the collected data
were provided by franchisors, the literature demonstrates that annual reports
validate more than 80% of the data. Therefore, no significant bias appears to
exist in this data (Shane, 1996).

Dependent Variables

International diffusion of franchising is defined as the geographical spread
of franchising within a foreign country (Hoffman & Preble, 2001). We
assessed this variable by considering the number of Spanish franchisee out-
lets (OUTLETS) located in Latin American countries. This variable ranges
from 1 franchisee outlet in a specific country (Haiti) to 498 (Mexico). As
stated before, a total of 2321 outlets were taken into account. However,
this measure does not always reveal the degree of international expansion.
Specifically, it is possible that some franchisors have different franchisee

FIGURE 1 The proposed model of international franchising.

26 V. Baena and J. Cerviño

outlets located abroad but that all of them were established in the same
foreign country. In this case, the international expansion of such a company
would be very limited. In order to deal with this problem, we have created
a second dependent variable that defines the number of Spanish franchisor
companies (FRANCHISOR) doing business in each Latin American country.
This variable spans from 1 (Haiti) to 63 (Mexico). The international diffusion
of foreign franchisors across Latin America was also assessed by considering
the franchising penetration among those markets (FRPENETR); that is, the
number of Spanish franchisors in each Latin American nation divided by the
number of franchisee outlets established by Spanish franchise chains in that
country. It ranks from 1 (Haiti and Paraguay) to 29 (Argentina).

Independent Variables

The geographical distance (GEODIST) was determined by computing the
kilometer distance between Spain (the home country of franchisors consid-
ered in this study) and the Latin American country (host country). In some
cases, we were not able to know the exact physical location of the franchisee
outlets considered in this work. Thus, geographical distance was drawn from
the kilometer distance between the capital of the franchisor’s home country
(Madrid, by default), and the capital of the nation where the franchisee out-
let is located.

Cultural distance (CULTDIST) was assessed by using Hofstede’s (2001)
work, which updates Hofstede’s (1980) study. This manuscript uses Kogut
and Singh’s (1988) index for each of the four Hofstede dimensions, an
approach that has been used very often in both traditional literature as well
as in recent research (see, e.g., Sakarya et al., 2007; Slangen & van Tulder,
2009; Yamin & Golesorkhi, 2010). Therefore, a cultural index was created as
follows:

CULTURAL DISTANCE =

− 2hi hj
h

(I I

)

4
,

where I
h
, with h = 1, 2, 3, and 4, refers to each of the four cultural dimen-

sions identified by Hofstede (2001), and V
h
represents the variance of each

dimension. In this data set the cultural distance index varies from 0 (for
Spain, by construction) to 6.69 (Venezuela). Data on uncertainty avoid-
ance (UNCERAVOID) and individualism (INDIVIDUA) were also obtained
from Hofstede’s (2001) paper. Additionally, the level of political stability
(POLITSTAB) was assessed by using data published separately in 2010 by
the International Monetary Fund. The lowest values correspond to nations
showing high political stability (in the data set 1.5 corresponds to Costa
Rica) and the highest value (44.60) is associated with Haiti. The 2010

International Franchising Decision-Making 27

World Bank Report was used to measure the unemployment rates of each
nation (UNEMPLOY), as done in previous literature (Baena, 2009; Habib &
Zurawicki, 2002).

Concerning the level of economic development (ECODEV), we fol-
lowed Alon’s (2010) example. It then was measured in terms of gross domes-
tic product per capita, because of its association with the population’s wealth,
the size of the middle class, and the level of development of the industrial
and service sectors (Alon & McKee, 1999). In this sense, data published by
the International Monetary Fund in 2010 were considered.

Control Variables

Finally, in conjunction with the previously mentioned independent vari-
ables, this article analyzes the effect of the host country’s market potential on
international franchise diffusion. This variable was measured by using data
published by the International Monetary Fund in late 2009 on country popu-
lation indicators (POPULATION), as suggested in recent literature (see, e.g.,
Rahman, 2003; Sakarya et al., 2007). In the data set, Panama ranks lowest
(3,322,000) while Brazil ranks highest (193,024,000). We also controlled for
a country’s efficiency of contract enforcement by following the evolution of
a disputed sale of goods, tracking the time, cost, and number of procedures
involved from the moment the plaintiff files the lawsuit until actual payment.
Specifically, as suggested in Djankov and colleagues (2003), this work uses
the three indicators developed by the Doing Business Index published in
late 2010 by the World Bank Group:

• number of procedures from the moment the plaintiff files a lawsuit in
court until the moment of payment (PROCEDURE);

• time elapsed (calendar days) in resolving the dispute (DURATION); and
• cost in court fees and attorney fees, where the use of attorneys is manda-

tory or common, expressed as a percentage of the debt value (COST).

Data Analysis

The analysis of the hypotheses proposed in this study was conducted by first
calculating the simple correlations. Subsequently, hypotheses were tested by
using ordinary least squares regression analysis as done in recent literature
on international franchising (Alon, 2010; Baena, 2012). Specifically, in order
to assess the market conditions that may drive international diffusion of fran-
chising into Latin America, six different regression analyses were conducted.
In this sense, it should be pointed out that those variables that were not
normally distributed entered the model in logarithmic form.

Also, to test the existence of collinearity among the variables, the
Variance Inflation Factor (VIF) Tolerance, and Mean VIF were computed in

28 V. Baena and J. Cerviño

the regression analyses. None were statistically significant, suggesting that
collinearity was not a problem in our regression models. For additional con-
firmation of these results, we calculated the determinant of the correlation
matrix, finding a value of 1, and were thus able to rule out problems of
multicollinearity.

RESULTS

Figures 2 and 3 show the physical distribution of Spanish franchisee outlets
across the Latin American markets. In particular, it is shown that Mexico,
Argentina, Venezuela, Brazil, and Chile occupy the top five positions and

FIGURE 2 Physical distribution of Spanish franchise systems across Latin America: Franchi-
sor. (color figure available online)

FIGURE 3 Physical distribution of Spanish franchise systems across Latin America: Outlets.
(color figure available online)

International Franchising Decision-Making 29

jointly possess 82% of the Spanish franchisee outlets established in Latin
American markets. In contrast, Honduras, El Salvador, Nicaragua, Paraguay,
and Haiti are the five Latin American countries with the lowest number of
Spanish franchisee outlets in their territory. Similarly, regarding the distribu-
tion of Spanish franchisors across Latin America, data reveal that Mexico,
Chile, Venezuela, Panama, and Guatemala occupy the top five positions.
Conversely, Honduras, Uruguay, Nicaragua, Panama, and Haiti are the Latin
American countries with the lowest number of Spanish franchisors.

As means of comparison, it is worth mentioning that eight Latin
American countries are among the 25 nations that show the highest num-
ber of Spanish franchisee outlets. Specifically, these are Mexico, Argentina,
Venezuela, Brazil, Chile, Guatemala, Colombia, and Peru. Moreover, Mexico,
Chile, Venezuela, Guatemala, Argentina, Dominican Republic, and Brazil
rank second, eight, twelfth, seventeenth, eighteenth, twenty first and twenty
fifth, respectively.

The descriptive statistics are reported in Table 1. Additionally, Tables 2
and 3 show the correlation matrix among variables and the results obtained
from the regression analyses, respectively.

As shown in Table 3, Models 1a and 2a consider the number of Spanish
franchisors (FRANCHISOR) in Latin American markets as a dependent vari-
able. In contrast, in Models 2a and 2b the dependent variable is measured by
using the number of Spanish franchisee outlets (OUTLETS). Finally, Models 3a
and 3b assessed the dependent variable by considering the Spanish franchise
penetration among Latin American markets (FRPENETR). Furthermore, Models
1a, 2a, and 3a test whether cultural distance (CULTDIST) is one of the factors
capable of constraining the spread of international franchising across Latin
America. However, this study argues that the predicted effect of cultural dis-
tance may be only applicable to two of the five Hofstede cultural dimensions:

TABLE 1 Descriptive Statistics

Variables Minimum Maximum Mean
Standard
Deviation

FRANCHISOR 1.000 63.000 13.750 13.416
OUTLETS 1.000 498.000 116.050 170.024
FRPENETR 1.000 29.000 6.560 8.392
GEODIST 6,383.000 10,039.000 8,337.800 1,018.069
CULTDIST 0.720 6.880 3.618 2.175
RISKAVER 11.000 101.000 78.722 24.876
INDIVIDUA 6.000 46.000 20.

8 12.405
POLITSTAB 1.500 42.600 7.458 9.228
ECODEV 2.650 22.120 10.275 4.742
UNEMPLOY 1.340 27.800 8.453 6.062
POPULATION 3,322,000.000 193,024,000.000

,305,896.500 47,746,371.689
DURATION 0.880 45.000 33.309 12.188
PROCED 30.000 1,459.000 627.947 350.439

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31

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32

International Franchising Decision-Making 33

uncertainty avoidance and individualism. As a result, in order to avoid hetero-
skedasticity, Models 1b, 2b, and 3b examine the effect of these dimensions
(RISKAVER and INDIVIDUA) by omitting the cultural distance variable.

Regarding the obtained results, it is worth mentioning that with the
exception of Models 1a and 1b, all of these were statistically significant. This
suggests that collectively, the different variables tested in this manuscript
help to explain the diffusion of the Spanish franchise system across Latin
America when the number of Spanish franchisee outlets located in Latin
American countries (OUTLETS) and the franchising penetration among those
markets (FRPENETR) are considered as dependent variables.

Findings also illustrate that the Latin American countries that attract more
Spanish franchise chains (FRANCHISOR) are characterized by high market
potential (POPULATION), efficiency of contract enforcement (DURATION),
as well as geographical and cultural distance (GEODIST and CULTDIST).
Thus, hypotheses H1a and H2a were supported at the 0.05 level.

As mentioned, the international expansion of franchising across Latin
American markets has been analyzed not only through the number of fran-
chisors (FRANCHISOR) but also by considering the number of franchisee
outlets located in those countries (OUTLETS). Results are shown in Models
2a and 2b. The difference between these models is that the former uses
cultural distance (CULTDIST) as an independent variable whereas this vari-
able is substituted by individualism (INDIVIDUA) and uncertainty avoidance
(RISKAVER) in Model 2b. As expected, the geographical and cultural distance
(GEODIST and CULTDIST) in conjunction with the host country’s market
potential (POPULATION), efficiency of contract enforcement (DURATION,
PROCEDURE, and COST), unemployment rate (UNEMPLOY), and political
stability (POLITSTAB) were significant and positively associated with the
dependent variable. Hence, hypotheses H1a, H2a, H5a, and H6a were sup-
ported at the 0.05 level.

Finally, concerning the third dependent variable considered in this
manuscript—the number of Spanish franchisors in each Latin American
nation divided by the number of franchisee outlets established by Spanish
franchise chains in that country (FRPENETR)—Models 3a and 3b show that
Latin American nations characterized by largest levels of market potential
(POPULATION) and efficiency of contract enforcement (PROCED and COST)
are preferred. Figure 4 summarizes the obtained results.

DISCUSSION AND CONCLUSIONS

International market selection is a critical component in the success or failure
of multinational firms. Thus, one of the key decisions in the internationaliza-
tion of a firm is the selection of the right country (Baena, 2012; Thompson
& Stanton, 2010).

34 V. Baena and J. Cerviño

While it may be more reassuring for investors to presume that firms
select markets on a rational basis, it is undoubtedly more realistic to admit
that a nonsystematic, strongly personalized, and essentially belief driven
market selection process is often characteristic of market selection decisions
(Alexander, Rhodes, & Myers, 2006). In an attempt to shed light on this topic,
this article lies in the realm of explaining franchising diffusion at a country
level perspective. In particular, based on an analysis of previous research
we propose a set of variables (geographical distance, cultural distance,
uncertainty avoidance, individualism, political stability, unemployment rate,
and economic development) as capable of driving international franchising
expansion. The effect of the host market’s potential and efficiency of contract
enforcement on international franchise expansion was also explored. To the

FIGURE 4 International franchising variables for country choice. * Significant at 10% level of
significance. ** Significant at 5% level of significance. *** Significant at 1% level of significance.

International Franchising Decision-Making 35

authors’ knowledge, no empirical study exists that tests the influence of all
these variables in the international franchising context, although previous lit-
erature has suggested its analysis (Alexander et al., 2006; Alon, 2010, Baena,
2012; Sashi & Karuppur, 2002, among others).

Moreover, the U.S. and British franchise business has attracted much
research interest. As a result, recent literature has encouraged researchers to
address the international diffusion via franchising by focusing on franchise
systems other than those from the United States and Great Britain. The pres-
ent work advances understanding by focusing on the entire Spanish fran-
chise system as opposed to a single sector as is the case in previous works
on this issue (Aliouche & Schlentrich, 2011; Alon & McKee, 1999; Doherty,
2007; Elango, 2007; Moore et al., 2010). Specifically, the 52 Spanish fran-
chise business sectors have been considered. The focus of this research on
Spanish franchise chains is quite relevant from an academic and practitioner
point of view. For instance, since the mid-1990s Spain has been the second
biggest country of origin for investment in Latin America, the number one
country was the United States (Toral, 2008). However, scant literature has
addressed the spread of international franchising in this region and the few
studies that have focused on it have been case studies (Baena, 2013). The
present study attempts to cover these research gaps.

Our results offer firm conclusions regarding which factors character-
ize those Latin American countries that are more likely to be the target of
franchising. In particular, results show that Latin American nations charac-
terized by political instability generate uncertainty and arbitrariness, which
involves higher transaction costs and reduces the willingness to enter these
markets. This contradicts prior literature where franchising was presented as
an appropriate mode for entering markets with significant political instabil-
ity. Specifically, some studies argued that companies investing in countries
characterized by high political instability may look for a local partner with
whom to share costs and to reduce the uncertainty associated with foreign
investment (Blomstermo, Sharma, & Sallis, 2005; Sashi & Karuppur, 2002).
This would increase the likelihood of entering those markets via franchising
(Baena, 2009). Nevertheless, our findings confirm that political instability
may lead to frequent changes in industrial and economic policies. This gen-
erates uncertainty and arbitrariness, involves higher transaction costs, and
increases the risk of business operations in a country (Fladmoe-Lindquist,
1996). In consequence, franchisors may avoid expanding their business into
those nations.

Furthermore, our findings reveal a positive association between unem-
ployment and international franchising. This result is consistent with prior
literature (Baena, 2009) and allows franchising to be considered as an alter-
native to other employment (Cooper & Gimeno, 1992) that involves less
risk than traditional entrepreneurship (Michael, 2003). Similarly, the diffu-
sion of international franchises is higher in nations where the time elapsed

36 V. Baena and J. Cerviño

in resolving disputes, costs, and number of procedures involved from the
moment the plaintiff files the lawsuit until actual payment is lower. This con-
firms prior literature and reveals the efficiency of contract enforcement as an
indicator of business risk (Baena, 2012).

Our findings also show that nations with a viable economy and signifi-
cant market potential attract foreign franchisors, as those countries are asso-
ciated with business growth and opportunities (Herrmann & Datta, 2002;
Rahman, 2006). Specifically, local agents find less difficulty in finding the
necessary resources to start up a new business when the region is character-
ized by high market potential. This increases the number of candidates to
become franchisees and reduces the risk of selecting the wrong sort of fran-
chisee, who might engage in opportunistic behavior against the franchisor’s
interests, thus reducing transaction costs (Alon, 2010).

We think another contribution of this article is that it reveals that when
cultural distance increases, firms operating globally will have to understand
the complexity of different cultures in order to set standards for evalua-
tion and monitoring local agents (Alon & McKee, 1999; Sashi & Karuppur,
2002). According to the positive association found between aggregate cul-
tural distance and franchise diffusion, we can argue that foreign investors
prefer adopting low ownership agreements, like franchising, to transfer the
responsibility of business management to local partners, who will be able to
set standards based on local practices and regulations to evaluate the perfor-
mance of local employees. This is because the transfer of management skills
to countries that are culturally dissimilar involves higher transaction costs
(Alon, 2010). Furthermore, selection and supervision costs are higher in cul-
turally distant markets, as the information asymmetries and the likelihood of
opportunistic behavior increases (Burton et al., 2000; Kogut & Singh, 1988).

Regarding the two other cultural hypotheses, results illustrate that the
expansion of franchising across Latin American nations is positively associ-
ated with cultures low in individualism and high in uncertainty avoidance.
This indicates that local agents view franchising as a method for minimiz-
ing business risk (transferring a proven successful business concept) as
suggested in literature (Michael, 2003). Thus, agents with high uncertainty
avoidance may opt for buying a franchise instead of opening a new business
from scratch. Nevertheless, the fact that franchisees have to adopt the fran-
chisor’s rules and decisions can help explain why franchising shows higher
presence in countries characterized by low individualism. Nonetheless,
we need to treat these claims with some caution, since they did not prove
to be statistically significant. Likewise, no significant evidence was found
between the host nation’s economic development and international franchise
expansion.

In sum, the present study provides insights that prove that international
franchising expansion depends on various country variables that franchisors
may evaluate before selecting suitable foreign markets to enter.

International Franchising Decision-Making 37

Theoretical Implications

Results obtained in this study can be interpreted as characterizing the
demand for franchising across Latin America nations. In most cases, litera-
ture has explored why franchisors go abroad as well as the optimal foreign
entry mode choice (Alon & McKee, 1999; Baena, 2009; Burton et al., 2000;
Elango, 2007; Hoffman & Preble, 2004; Michael, 2003; Sashi & Karuppur,
2002; Quinn & Doherty, 2000; Welsh, Alon & Falbe, 2006). Nevertheless,
research is needed in country choice (Thompson & Stanton, 2010). Given
the important fact that franchisors must find local partners to become fran-
chisees, our findings show the importance of adopting a host country per-
spective when exploring the franchise diffusion across foreign nations.
Moreover, this study provides readers with an overview of the current litera-
ture on global franchising diffusion. We hope it serves as a useful starting
point for future researchers interested in studying international expansion
via franchising.

Practitioner Implications

Most economic reports argue that by 2050 the largest economies in the world
will be China, United States, India, Brazil, and Mexico. This fact highlights
the substantive importance of Latin America for foreign investors willing
to expand their business abroad. Moreover, a new group of countries in
the region is emerging as a viable alternative (the so-called new tigers).
Characterized by youthful populations, growing middle classes, relatively
low debt, and dynamic economic expansion, countries such as Colombia
and Peru are poised to grab a bigger share of the region’s growth and attract
more money from international investors.

In an attempt to give insights from the Latin American context, the pres-
ent article develops and tests a model that can be useful not only to academ-
ics wishing to enhance their knowledge about country choice via franchising
but also to franchisors willing to establish new outlets in Latin America. In
addition, our findings offer guidance to firm managers seeking to target their
franchises in these markets. Franchisors may then use the results of this study
as a starting point for identifying such regions whose characteristics best
meet their needs of expansion. As a consequence, using our results along
with political forecasts from sources such as Euromoney, franchise chains
with little experience might do well to expand into Latin American markets
showing high levels of economic development and market potential.

Limitations and Directions for Future Research

Our results offer several firm conclusions regarding the factors that con-
strain global franchising in Latin America. However, this study has certain

38 V. Baena and J. Cerviño

limitations that need to be dealt with by future research. First, our study
only refers to Spanish franchisor companies. The literature has emphasized
there is a great need for deeper explanatory models of international diffu-
sion via franchising, one that can explore this issue by focusing on franchis-
ing systems other than the British and U.S. models (Alon, 2010). However,
it would be valuable for a future study to analyze franchisors coming from
other nations to test whether it is possible to generalize the results obtained
in this study.

Second, information about the Spanish franchise system was gathered
by accessing multiple secondary data sources, and while this methodol-
ogy has been used previously in studies on franchising (Alon, 2001; Baena,
2009), we encourage further researchers to compile information by using
primary sources to whether differences exist.

Third, the present study implicitly assumes that franchisors have made
an equal effort to “sell” franchises within each nation in the sample and that
franchisors use similar policies across nations. This may or not may be true,
as Spanish franchisors in general may target the Latin American nations more
aggressively than other countries located in Africa or Australia, for instance.
Further research should examine this point in more detail, which would pro-
vide interesting findings to complement our current understanding on this
topic. Additionally, the findings of this work are encouraging for developing
further research on the driving variables in the international spread of fran-
chising across countries. However, conceptually and empirically more work
is necessary to refine the model.

Finally, one interesting issue would be to study the internationalization
process of the growing Latin American franchisors. For instance, according
to the Iberoamerican Federation of Franchising Report published in 2012,
the number of franchise brands in Latin America and the percentage of
national versus foreign franchises are notably increasing. Many of these Latin
American chains are developing internationalization projects either in other
Latin American countries or third-world countries. So, a possible line of
research would be the analysis of how these growing and emerging fran-
chise chains select their potential foreign market and test the results with
prior research.

In sum, we hope that our findings contribute to the development of a
robust research agenda and advance the literature in providing enlighten-
ment on this topic; particularly in Latin America, which despite its substan-
tive worldwide economic importance has received very limited attention.

NOTES

1. Economists explain moral hazard as a special case of information asymmetry. In particular, moral
hazard occurs when the party with more information about a certain issue has a tendency or incentive to

International Franchising Decision-Making 39

behave inappropriately from the perspective of the party with less information. In contrast, the adverse
selection refers to a market process in which the “bad” products or services are more likely to be selected
when buyers and sellers have asymmetric information. These problems were firstly presented by Akerlof
(1970).

2. In 2005, Hofstede developed a fifth dimension: long-term orientation, based on the research of
Michael Harris Bond, and published in the 2nd edition of Cultures and Organizations, Software of the
Mind (2005). More recently, a new 6th dimension: indulgence versus restraint, has been added. However,
scores of these two new dimensions are only available for some but not all Latin American countries.

3. The list of Latin American countries comprises the following nations: Antigua and Barbuda,
Argentina, Bahamas, Barbados, Belice, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican
Republic, Ecuador, El Salvador, Grenada, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico,
Nicaragua, Panama, Paraguay, Peru, Puerto Rico, Saint Lucia, Saint Kitts and Nevis, Saint Vincent and the
Grenadines, Suriname, Trinidad and Tobago, Uruguay, and Venezuela. In early 2011, Spanish franchisors
were doing business in 20 of them: Argentina, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican
Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru,
Puerto Rico, Uruguay, and Venezuela.

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International Franchising Decision-Making 43

APPENDIX
BUSINESS SECTORS IN THE SPANISH FRANCHISE SYSTEM

1 Real state agencies 27 Kids wear and youth fashion
2 Food chains 28 Fashion lingerie
3 Beauty and personal care products 29 Fashion various
4 Aesthetic and beauty centers 30 Entertainment and leisure
5 Dental clinics 31 Stationery and office supplies
6 Second hand products: selling and buying 32 Optical
7 Communications, internet and telephony 33 Bakery and pastry
8 Business advice and consulting 34 Drug store
9 Cosmetics 35 Hair dressing

10 Dietary and herbal remedies 36 Specialized products
11 Education and training 37 Advertising and communications
12 Photography 38 Consumables and recycling
13 Hotel and restaurant: coffee shops 39 Personal relations
14 Hotel and restaurant: beer and brewery 40 Home services
15 Hotel and restaurant: fast food 41 Car services
16 Hotel and restaurant: ice cream 42 Transportation services
17 Hotel and restaurant: tapas Bar 43 Specialized services
18 Hotel and restaurant: thematic 44 Financial services
19 Hotel and restaurant: other various 45 Home textile and decoration
20 Hardware and software 46 Wine shops and bars
21 Jewelry and fashion jewelry 47 Sport outlet
22 Toys 48 Specialized shop
23 Furniture 49 Dry cleaning
24 Men’s fashion and shirts 50 Vending
25 Fashion complements 51 Travel services
26 Women’s fashion 52 ATM video and video clubs

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