Explaining MNC Profitability: Country-Specific, Industry-Specific and Country-Industry Interactive Influences

Introduction What factors explain international patterns of corporate profitability? Some scholars have suggested that it is the addition of some country-based influence which explains the differences; others have suggested that it is the addition of some industry-based influence. From a country-specific perspective disparities in organizational/national cultures (Hofstede 1980, Collins/Sekely 1986), distinct internationalization advantages (Anderson/Coughlan 1987), or varying infrastructure or distribution requirements (Keegan 1984) have each been offered as an explanation for country-based differences in firm performance. Industry-specific Influences Other scholars have suggested that industry-specific influences such as industry rates of growth (Cantwell/Sanna-Randaccio 1993) or the stage of the life cycle (Lambkin/Day 1989, Wert 1973) may result in different levels of firm performance. It may be that cross-national differences in profitability merely reflect national differences in home country firms' distributions across industries. Interactive Influences Recently, Porter (1990 a, 1990 b) has argued that homogenizing forces have lead to a "shrinking" world, one in which it is vital for firms to be able to differentiate themselves from their competition. A major basis of this differentiation stems from innovation, which, Porter (1990a) intimates, appears to primarily occur in the home country because each nation possesses unique characteristics which allow specific industries to flourish. As a consequence, industrial "clusters of excellence" take root in various countries. By crossing national boundaries but maintaining national "virtues", firms can outperform their foreign rivals. Thus, for Porter, it is this "interaction" of home country and industry that results in excellence; global strategies merely augment the advantages conveyed by the home country, they do not supplant them. Firms that abandon their national basis of advantage, risk extinction. Incremental Influences However, rather than use these approaches to address the question of the determinants of multinational firm profitability, previous scholarship has commonly used an incremental approach. From this perspective, past profitability is seen as being the best predictor of current profitability. Although Whittington (1971) was the first to use the lagged endogenous variable, the practice of using past performance as a predictor of current performance has been used as recently as 1989 (Haar 1989). Haar comments on the usefulness of the incremental variable, ". the inclusion of past profitability very significantly increases the explanatory power of the regression equation" (1989, p. 6). Haar notes that the [R.sup. 2]'s range from a statistically significant high of 0.818 when past performance (measured as a 5-year average of net income/assets [ROA]) is included to a nonsignificant F value when the incremental factor is removed. Incrementalism's contribution ranges from an [R.sup. 2] of 0.168 to an [R.sup. 2] of 0.724 and, according to Haar, ". past performance is the single greatest contributor to explained variance" (1989, p. 12). This finding undergirds the importance of incremental variables in previous attempts to explain international patterns of firm profitability. The Problem The above findings may be considered problematic for at least two reasons. First, as will be seen in the literature review, the previous results appear to be a theoretical empiricism lacking any theoretically interesting justification. Second, and perhaps more important, it is unclear what exactly is being measured. Kumar (1984) and Haar (1989) used five year averages to measure both the dependent variable and the incremental variable. What the equation appears to be saying is that the last five years average firm performance is a function of the average firm performance of the preceding five years. …