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Product and geographic scope changes of multinational enterprises in response to international competition

Abstract

What happens when multinational enterprises (MNEs) face competition in their own home market from imports or through foreign direct investment (FDI)? We provide a differentiated assessment of the influence of these two types of foreign competition on the product and geographic scope of MNEs. We apply the awareness–motivation–capability framework to international business (IB), hypothesizing that an increase or decrease in scope depends on the motivation and ability of an incumbent firm to respond to an incursion into its home market, and on the objectives and commitment of the firm that is entering that market. We assessed the scope changes of 407 large US firms between 1987 and 2003, and found that increasing imports led to scope reduction, while increasing FDI had the opposite effect. Our analysis of 95 large German firms for the same period led to similar, but somewhat less consistent, results.

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Figure 1

Notes

  1. Rugman and Verbeke (2004) show that the largest 500 MNEs account for over 90% of the world's FDI stock, and conduct about 50% of world trade.

  2. As our study focuses on the strategic content aspects, that is, scope changes, of international competitive dynamics, we do not explore strategy process aspects related to competition awareness in greater depth. We address this point in the limitation section.

  3. COMPUSTAT has some limits as a data source (e.g., Davis & Duhaime, 1992), but, to our knowledge, it is the only source of product and geographic segment data for the time frame required by the longitudinal design of our study.

  4. The HDAX index combines the DAX, which includes Germany's 30 largest public firms by market capitalization, the MDAX, which includes the next 70 largest public firms, and the TecDAX, which includes public technology-focused firms.

  5. Financial institutions, real estate companies, and financial holdings are not included, as the corporate strategies of such firms are significantly influenced by portfolio optimization objectives that are outside the focus of this study. All other industries are included.

  6. The level of detail available varies according to the base data reported by the respective national statistics offices. US data are broken down into 237 ISIC industries; German data are broken down into 68 ISIC industry sectors. In the case of Germany, industry sector-level figures were applied to all industries included in the respective sector.

  7. Industry concentration data are not available on a per-annum basis, which represents an unfortunate limitation. Having to deal with this limitation, we addressed this issue as follows. For the US, the 1992 data were used for the years 1987 to 1996, the 1997 data for 1997 to 2001, and the 2002 data for 2002 and 2003. For Germany, the 1999/2000 data were used for all years prior to 2001, whereas the 2001/2002 data were used for all other years.

  8. Core business size is measured by the largest business segment's sales.

  9. We performed robustness checks using independent variable lags of one, two and three years, as well as a weighted average composite approach that places increasing weights on more recent years using data for up to 10 years for AFC and LFC. While coefficients and significance levels varied slightly, overall effect directions and significance remained consistent. We reflect results based on the lags that best match our theoretical argument.

  10. This approach gives the same results as including time dummies without consuming as many degrees of freedom.

  11. We are grateful to an anonymous reviewer for raising these questions.

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Acknowledgements

The authors are grateful for valuable comments and suggestions received from the three anonymous JIBS reviewers, JIBS Area Editor Arjen van Witteloostuijn and JIBS Editor-in-Chief Lorraine Eden, which have significantly improved this article. The authors also thank JIBS Managing Editor Anne Hoekman for excellent service.

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Correspondence to Thomas Hutzschenreuter.

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Accepted by Arjen van Witteloostuijn, Area Editor, 1 October 2008. This paper has been with the authors for three revisions.

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Hutzschenreuter, T., Gröne, F. Product and geographic scope changes of multinational enterprises in response to international competition. J Int Bus Stud 40, 1149–1170 (2009). https://doi.org/10.1057/jibs.2009.4

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Keywords

  • internationalization
  • global competition
  • foreign direct investment
  • imports
  • scope
  • diversification