The influence of subnational borders on
firm performance
Master Thesis
Frien Haarsma
S3540464
MSc Strategic Innovation Management
Faculty of Economics and Business
University of Groningen
Date: 06-24-2018
Supervisor: Dr. K.J. McCarthy
Co-accessor: Dr. F. Noseleit
Abstract:
This study addresses the question of whether firms crossing borders within countries, known as
subnational borders, encounter comparable influence on firm performance when firms cross
national borders. Based on the literature on the Liability of Foreignness and subnational
borders, propositions were developed. By conducting twelve semi-structured interviews with
sales managers in Belgium, The Netherlands, Spain, Germany, and Italy, the propositions were
tested. The results of this study find that multiple liabilities of Foreignness do, in fact, have an
influence on firm performance when firms cross subnational borders. It shows that subnational
borders are not to be taken lightly and that companies should apply refined strategic tactics in
order to overcome the identified liabilities when crossing subnational borders.
Keywords: Subnational borders, Liability of Foreignness, Firm Performance
3
Table of Contents
I. Introduction ... 5
II. Literature Review ... 7
2.1 Collection of Literature ... 7
2.2 Liability of Foreignness ... 9
2.3 Subnational Borders ... 11
2.3.1 Definition of Subnational Borders ... 11
2.3.2 Constructs of Subnational Borders ... 11
2.3.3 Political/Institutional differences ... 12
2.3.4 Cultural differences ... 12
2.3.5 Economic Differences ... 14
2.4 LoFs & Subnational Borders - Propositions ... 15
2.4.1 Unfamiliarity Hazards and Subnational Borders ... 15
2.4.2 Discrimination Hazards and Subnational Borders ... 17
2.4.3 Relational Hazards and Subnational Borders ... 19
2.4.4 Moderating LoF and Subnational Borders ... 21
2.5 Outcomes of LoFs – impact on firm performance ... 22
2.6 Conceptual model ... 22
III. Methods ... 23
3.1 Field Research ... 23
3.2 Overview of companies and interviewees ... 24
IIII. Results ... 25
4.1 Unfamiliarity Hazards & Subnational Borders ... 25
4.1.1 Lack of embeddedness ... 25
4.1.2 Lack of experience ... 25
4.1.3 Lack of regional business & institutional knowledge ... 26
4.1.4 Overview Unfamiliarity Hazards ... 27
4.2 Discrimination hazards & Subnational borders ... 28
4.2.1 External conformity pressures ... 28
4.2.2 Lack of local legitimacy ... 28
4.2.3 Limited access to resources... 29
4.2.4 Negative regional tendencies ... 30
4.2.5 Overview Discrimination Hazards ... 31
4
4.3.1 Degree of network integration ... 32
4.3.2 Different corporate cultures. ... 32
4.3.3 Lack of trust ... 33
4.3.4 Ownership structures... 34
4.3.5 Overview Relational Hazards ... 35
4.4 Moderating effect – Firm Size ... 36
V. Discussion and Conclusion ... 38
5.1 Discussion ... 38
5.2 Limitations and Future Research ... 41
5.3 Conclusion ... 42
5.4 Contributions ... 43
5.5 Managerial Implications ... 43
References ... 44
Appendix 1: Systematic Literature Review Subnational Borders (Excel Sheet) ... 51
Appendix 2: Systematic Literature Review Liability of Foreignness (Excel Sheet) ... 52
Appendix 3: Interview Protocol ... 53
5
I. Introduction
Entering geographical areas that are unknown such as foreign markets expose companies to
numerous challenges. Companies need, for example, to adjust to the local language, have to
deal with price differences, or deal with different political/institutional laws. Existing literature
on internationalization suggests that crossing borders is expensive and brings more hazards to
companies (Hymer, 1976; Zaheer, 1995). Theory on the costs of crossing national borders is
also referred to as the Liability of Foreignness (Nachum, 2003; Zaheer, 1995). One of the most
influential scholars on internationalization, Zaheer (1995), found that operating in foreign
countries confronts a firm’s performance with costs arising from a geographical distance,
unfamiliarity with the host country, costs intrinsic to the host country and costs connected to
the home country.
6
Research by Sofka & Zimmermann (2008) empirically tests the effect of economic stress of
regions and find a significant impact of these regions on multinational strategies. Additionally,
Nachum (2003) empirically tested the impact of Liabilities of Foreignness in London and
contrary to expectation, found that foreign firms had more advantages than domestic firms
located in London, due to a local economic environment that offered more financial benefits
for foreign firms. Lastly, Mezias (2002) cautions that prior studies on Liabilities of Foreignness
are hard to generalize since they have been largely ignoring the effect of regions. These papers
make clear that future research should try to understand the effect of subnational borders
conceptually. Therefore, the following research question is addressed;
What is the influence of subnational borders on firm performance?
Although the literature on the Liability of Foreignness and subnational borders separately is
extensive, a combination between both research areas has, hitherto, never been made.
Consequently, the purpose of this study is to understand the influence of subnational borders,
and more importantly, how it may affect a firms’ performance. Systematically reviewing the
literature on the constructs of subnational borders and literature on the Liability of Foreignness
resulted in a conceptual framework. Upon this conceptual framework, interviews with twelve
domestic sales- or commercial managers provided data to formulate an answer on the central
research question by applying the framework in practice.
7
II. Literature Review
2.1 Collection of Literature
The literature on subnational borders and Liability of Foreignness (hereafter LoF) are separately
and systematically reviewed. Eventually, the literature on both topics is combined to develop
propositions and a conceptual model. A systematic literature review is used since, according to
Blumberg, Cooper, and Schlinder (2008), it is one of the most efficient and high-quality
methods for identifying and evaluating extensive literature. Key contributions are used to
answer the research question, which makes a systematic literature review the most suitable
(Tranfield, 2003). The steps introduced by Tranfield (2003) are followed to conduct a
systematic literature review correctly:
Figure 1. Stages of Systematic Review (Tranfield, 2003)
Since both literature streams are distinct, different methods are used to guarantee the quality of
this research. First of all, the literature on LoF has been accessed, which led to the study of
Denk, Kaufmann, and Roesch (2012). Their systematic literature review on Liabilities of
Foreignness provided a solid base that is used to identify the drivers of LoF. Denk et al. (2012)
systematically reviewed data based upon the quality of the papers in which the LoF occurred.
The quality of the papers was based on the rankings of top-tier international business papers,
according to Tahai and Meyer (1999) and DuBois and Reeb (2000). The systematic literature
review by Denk et al. (2012) is used as a start since it is, until now, the most current systematic
literature review on the vast field of research on LoF. Moreover, the paper is peer-reviewed,
utilized top journals, and is written in English.
From To
Stage I - Planning the review 21-nov 18-feb
Phase 0 - Identification for the need for a review 21-nov 28-nov Phase 1 - Preparation of a proposal for a review 28-nov 12-jan Phase 2 - Development of a review protocol 4-feb 18-feb
Stage II - Conducting a review 18-feb 12-apr
Phase 3 - Identification of research 18-feb 18-feb
Phase 4 - Selection of studies 18-feb 1-apr
Phase 5 - Study quality assessment 18-feb 1-apr
Phase 6 - Data extraction and monitoring progress 18-feb 1-apr
Phase 7 - Data synthesis 1-apr 12-apr
8
Papers to get additional information (other than the identified papers by Denk et al. (2012)) on
LoF are thoroughly checked on their relevance. An overview of the utilized papers on LoF is
added in Appendix
1. Firstly, additional papers on LoF were found by making use of the
keyword LoF. Secondly, the titles were investigated, the abstracts, the introduction, and the
keywords that the papers used. Thirdly, the papers needed to be peer-reviewed. Fourthly, papers
were selected from SmartCat and Google Scholar since these databases contain a sufficient
amount of papers. Fifthly, the papers needed to be written in English. Since many highly
influential papers on LoF have been accessed, the average of citations for the relevant 26 LoF
papers collected is 1558 per paper.
9
2.2 Liability of Foreignness
Hymer (1976) has been one of the first researchers noticing the liabilities companies face when
expanding abroad. More critical work has been done by Zaheer (1995, p. 6), who defines LoF
as ‘all of the additional costs that a firm operating in a market overseas incurs compared to a
local firm.’ These additional costs come, according to Zaheer (1995), from four different
sources: (1) costs incurred through geographic distance, (2) costs coming from lacking
knowledge about the local environment, (3) costs intrinsic to the home-country and (4) lastly
costs occurring connected to the home country. These four costs vary at a subnational level.
The costs incurred through geographic distance are present on the subnational level as well but
might be less relevant in small countries like the Netherlands. However, companies in Italy that
cover the entire market might encounter difficulties when transporting (fresh) products from
the north, too, e.g., Sicily. A lack of knowledge about the local knowledge on subnational level
occurs when companies from one region enter a region that is alien based upon economy,
culture or politics (e.g., different local language or local price differences). They might need to
make use of local distributors or (local) sales agents/managers that do possess this knowledge
to overcome the barriers deriving from a lack of knowledge.
Regions within a country might possess a certain degree of ‘nationalism,’ especially within
Europe, there are regions that in the past (or currently) opted for independence. Companies
from these regions might possess a lower acceptance for companies that are not from these
regions, also referred to on an international level as costs intrinsic to the home country. Political
differences on a subnational level influence firm performances as well; an actual and relevant
example is Catalunya where the local economy was affected due to the call for independence
of the local government (Mueller, 2019). These costs are identified by Zaheer (1995) as costs
connected to the home-country, coming from political institutions.
10
Secondly, Eden and Miller (2001) add that costs derive from an unfavorable position of the
foreign company in a host country, due to consumer ethnocentrism or political hazards. These
are called discrimination costs. Thirdly, relational hazards occur from higher organizational
costs for internal and external transactions (Eden & Miller, 2001). Relational Hazards are also
referred to as ‘the administrative costs of managing the relationships between the parties
involved in doing business abroad’ (Eden & Miller, 2001, p. 3). Buckley and Casson (1998)
refer to relational hazards as the additional transaction costs of negotiating, monitoring, and
dispute settlement faced by the MNE if it serves the foreign market through the external market.
A literature review on the literature of Liability of Foreignness by Denk et al. (2012) revealed
an extensive list of drivers of LoFs, classified on the hazards identified by Eden and Miller
(2001) and the central article by Zaheer (1995);
Figure 2. Drivers of LoFs in past and post-LoFs research (Denk et al., 2012)
Drivers for… Past LoFs Research Post-JIM-SI LOFs Research
Unfamiliarity Hazards Lack of of embeddedness in networks Lack of of embeddedness in networks
Lack of international experience Lack of international experience
Lack of local business and institutional knowledge Lack of local business and institutional knowledge
Discrimination Hazards Lack of local legimacy External conformity pressures
Lack of local legitimacy Limited access to resources Negative nationalistic tendencies
Relational Hazards Lack of trust Degree of network integration
Different corporate cultures Lack of Trust
Ownership structures ALL LOFs Hazards Distance (i.e., cultural -, institutional -, linguistic -, spatial -) Cultural sensitivity
Distance (i.e., cultural -, institutional -, linguistic -, spatial -) Economic development and stress of host market
Firm characteristics (i.e. firm size, business group affiliations, learning capabilities, management qualities)
11
2.3 Subnational Borders
In order to understand the effect of sub-national borders, one must first understand what
subnational borders are and how they are formed.
2.3.1 Definition of Subnational Borders
A subnational border is defined as ‘a border that divides regions within a single nation’ (Hills,
2016, p.8). Additionally, researchers define subnational border regions as areas wherein
economic and social life is directly and significantly affected by the proximity to a politically
defined geographical subnational border (Hansen, 1976; Paasi, 1999).
According to one of the most influential scholars in geographical studies, Anssi Paasi, these
subnational borders come to exist due to the (historical) formation of regions within countries
(Paasi, 2000). Four (simultaneously) aspects can analytically distinguish the formation of such
regions. These aspects are the ‘the formation of (1) territorial, (2) symbolic and (3) institutional
shapes of a region and (4) its establishment as an entity in the regional system and social
consciousness of the society concerned’ (Paasi, 2000, p. 6). The attention for the formation of
regions has gained much attention lately, also referred to as ‘new regionalism’ (e.g., Keating,
1997; Mansfield & Solingen, 2010). Research on this new regionalism gained much attention
since scholars try to shed new light on why regions and regional borders are so crucial for
economic, cultural and political development in times of globalization (e.g., Ohmae, 1995;
Newman, 2006).
2.3.2 Constructs of Subnational Borders
12
forward from regional identities – these regional identities are formed by social constructs (i.e.,
cultural differences).
More empirical evidence derives from Paasi (2009) who proofs with a case study on Finnish
regions how these regions come to exist due to social constructs such as culture, economics,
and politics. If we follow the reasoning by Paasi (2009) and Tabellini (2010), who empirically
show that regional identities are made up by social constructs, we can distinguish three actors
that form regional identities and thereby subnational borders. Regions form and are formed
generally by politics/institutions, culture, and economics (Keating, 2004; Paasi, 2010). Since
these actors are very intertwined (Cohen, 1996), examples are used to clarify the underlying
distinctions.
2.3.3 Political/Institutional differences
Regional politics do influence firms and firm performance. As Paasi (2011) articulates, regional
politics are often expressed by promoting the ‘regional identity’, such as promoting the
inhabitants to buy from local (regional) producers, setting-up regional education programs to
promote the local dialect or local language, promoting regional inhabitants to visit local cultural
events or by starting local political parties that protect the regional identity. Moreover, regional
tempt to protect the local environment, by, e.g. granting building permits or making the local
environment more attractive for companies (Duijvendak, 2008).
Kozhikode and Li (2012) show that firms can use subnational institutional differences to
improve firm performance. The effects can be clarified by using the following situation;
suppose that the regional government of Flanders is ruled by an extreme right party (that is
mainly focussing on profit maximization) while the political situation of Wallonia is ruled by
an extremely left party (who is focused on sustainability). If a bio-industry company with a big
ecological footprint from Flanders wants to open a production plant in Wallonia, regional
policies can restrict (due to local laws, e.g., by demanding higher taxes for polluting companies)
this kind of companies for their unsustainable products while promoting (local) sustainable
alternatives.
2.3.4 Cultural differences
13
2003; Raagmaa, 2002). It is also recognized as the primary driver of regional identities (Paasi,
2009). There are many ways in which researchers tried to capture culture (Lomnitz-Adler,
1991), although it is hard to distinguish one framework or concept of culture that can be applied
to every region. Some authors who tried to define regional cultural differences in the United
States are Elazar (1970) and Lieske (1997). Elazar (1970) and Lieske (1997) articulate that the
primary drivers of culture are defined as race-ethnic ancestry, religious affiliation, and social
structure. Based on these classifications, Lieske (1997) identified nine different cultures within
the USA.
One can think of multiple examples of regions within Europe that are formed by the drivers of
culture identified by Elazar (1970) and Lieske (1997). Friesland, Catalunya,
German-Switzerland, Basque Country, East Germany or Wallonia are some of the examples in Europe
that show a distinctive dialect/language, have different forms of religion or show apparent
differences in lifestyle. Regional identities are formed by culture, and these cultural factors are
expressed in plenty of ways (Paasi, 2010). Regions with specific identities can bring forth a
specific type or preference for food, religion, sport, music, media, political view etcetera.
A study conducted by Kaasa, Vadi, and Varblane (2014), based on Hofstede’s cultural
dimensions (1980), delivers empirical evidence for these regional cultural differences within
Europe. While Hofstede assumes ‘cultural means’ to measure national cultural differences,
empirical evidence by Kaasa et al. (2014) shows one cannot assume these ‘central means’ of
culture to measure differences between countries. Kaasa et al. (2014) used the European Social
Survey (ESS), showing that cultural variations within several countries are even bigger than
between countries (e.g., France or Portugal). The study by Kaasta et al. (2014) shows how
significant cultural differences are within countries, bringing forward cultural borders Hofstede
did not take into account when applying cultural means (Baskerville, 2003).
14
subnational perspective, this ‘Multiple Cultures Perspective’ implies that companies need to
apply different (sales) strategies for different regions of a country.
2.3.5 Economic Differences
Just as political and cultural differences, economic differences between regions create
boundaries as well. According to Keating (1996), especially regions or states that are
industrially and economically advanced in contrary to other regions are strengthened in their
call for regionalism. Typical recent examples of this are Northern Italy, where the Lega Nord
was aiming for an independent region (Giordano, 2000) or Catalonia, which is still aiming for
independence (Serrano, 2013). Both regions are, compared to other regions within Italy or
Spain, very wealthy and paying taxes that are relatively higher than the other regions (Giordano,
2000; Serrano, 2013). Politicians are using these messages to justify their call for independence.
A study by Balaguer and Ripolles (2018) shows the significant impact of subnational borders
on consumer prices (fuel) – most importantly, in a nation (Spain) that is free of formal trade
barriers. The identified price differences in a country free of trade barriers derive due to the role
of competitors, and production/operational costs that differ per region. Moreover, Balaguer and
Ripolles (2018) notice the influence of subnational borders on consumer prices, but the authors
state that their evidence does not clarify why precisely these regional differences in prices occur
and what the role of subnational borders is in this matter.
Economic differences of regions within countries occur because some regions have access to
valuable
natural
resources,
have
proximity
to
metropoles,
possess
important
technological/knowledge development areas or have a geographical/historical great location
advantages (Paasi, 2009). Just as cultural or political differences, economic differences form
the regional identity and thereby subnational borders. Rich regions (‘us’) might perceive poorer
regions as ‘them,’ lowering the willingness to business opportunities.
15
2.4 LoFs & Subnational Borders - Propositions
Following the drivers identified by Denk et al. (2012), each of these drivers arguably have an
impact on regional borders too – following the example in the introduction. Drawing from the
post-JIM-SI LoFs literature and the literature on subnational borders, the following propositions
are developed.
2.4.1 Unfamiliarity Hazards and Subnational Borders
The first identified driver of LoFs by Denk et al. (2012) is the lack of embeddedness in
networks. Rangan and Drummond (2004) define the drivers of embeddedness in a local network
as ‘ties with the focal host nation,’ that come from geographic, colonial, immigration, linguistic
and institutional dimensions. Apart from immigration and colonial ties, which are not relevant
when focusing on subnational borders, geographic, linguistic, and institutional dimensions are
present too following the drivers of subnational borders as social constructs. Rangan and
Drummond (2004) empirically show that firms who lack embeddedness in a local network face
disadvantages; companies operating in regions in which they are not familiar with have more
difficulties in managing information flows, understanding the consumer tastes and, ongoing
operations (e.g., regional promotion activities, might take longer due to for instance
unfamiliarity with the local language).
Proposition 1a: Unfamiliarity hazards that derive from subnational borders influence firm
performance due to a lack of embeddedness in the regional network.
16
Proposition 1b: Unfamiliarity hazards that derive from subnational borders influence firm
performance due to a lack of regional experience.
The third dimension that is linked to the unfamiliarity hazard is the lack of local business and
institutional knowledge. Elango (2009) argues that the lack of local business and institutional
knowledge may lead to a misunderstanding of the local market and the underlying market
patterns. Moreover, Elango (2009) and Chetty, Eriksson, and Lindbergh (2006) find that the
lack of knowledge about the local institutional environment may lead to several costs. These
costs may be incurred by incorrectly applying (formal) local rules and norms or due to delays
coming from (informal) differences such as local business cultures. These differences cause
that it is harder to start activities or maintain activities when crossing borders because, for
example, the time before getting a building permit might differ between regions within a
country. Since subnational borders give political, economic, and cultural constraints, the lack
of regional business and institutional knowledge lead to costs too for firms that are crossing
subnational borders.
17
2.4.2 Discrimination Hazards and Subnational Borders
One of the LoFs identified by Denk et al. (2012) under the discrimination dimension is external
conformity pressures. External conformity pressures imply that companies need to conform to
their local environment (Beugelsdijk, Brakman, Van Ees, & Garretsen, 2013). Beugelsdijk et
al. (2013, p. 38) find that when firms operate in foreign countries; ‘subsidiaries need to conform
to local regulations, business practices, and consumer preferences, among other pressures.’
Firms that consistently succeed in adjusting to local consumer preferences or establishing strong
ties with local stakeholders are considered to have a high ‘national responsiveness’ (Miller &
Eden, 2006). Firms that cross subnational borders need to adjust to local regulations, business
practices, and consumer preferences.
Proposition 2a: Discrimination hazards that derive from subnational borders influence firm
performance due to external conformity pressures.
Local legitimacy ‘is a generalized perception or assumption that the actions of an entity are
desirable, proper, or appropriate within some socially constructed system of norms, values,
beliefs, and definitions’ (Suchman, 1995, p. 574). Companies that operate in a foreign market
need to gain legitimacy to gain credibility (Alcantara, Mitsuhashi, & Hoshino, 2006). Since
crossing subnational borders can cause a certain kind of disapproval towards companies (‘us’
and ‘them’ thinking), a lack of local legitimacy can cause additional costs as well.
Proposition 2b: Discrimination hazards that derive from subnational borders influence firm
performance due to lack of local legitimacy.
Firms that are experiencing difficulties in finding the right employees for their foreign
subsidiaries or that have limited access to local partners (e.g., clients and suppliers) are
confronted with costs coming from limited access to resources (Hessels & Parker, 2013). Firms
crossing subnational borders can have difficulties with finding the right employees or managing
employees in areas that are proximate to subnational borders (language differences or economic
differences). Limited access to the right suppliers or networks might bring additional costs as
well, referring to unfamiliarity hazards that explain why regional firms experience difficulties
in finding the right (strategic) partners.
18
The last identified discrimination hazard identified by Denk et al. (2012) is the probability of
negative nationalistic tendencies. The influence of nationalistic tendencies becomes clear using
research by Balabanis, Diamantopoulus, Mueller, and Melewar (2001), who show the effect of
strong nationalism and patriotism on consumer behavior in Turkey and the Czech Republic.
When consumers have a strong tendency to choose products produced in their country of origin,
it can harm foreign companies that try to enter and expand in the concerned market (Balabanis
et al., 2001). Zooming in on a regional level, subnational borders might create negative regional
tendencies too. A relevant example is the case of the typical regional product cava in Catalunya.
Once the regional Catalonian government declared interdependency, there was a national
boycott on Cava, and other products originated from Catalunya (Tieleman, 2017).
19
2.4.3 Relational Hazards and Subnational Borders
The degree of network integration might be relevant for regional firms that are inexperienced
within specific areas and therefore make use of third parties (distributors/wholesalers) to sell
their products. The degree of network integration defines till what an extent a firm is integrated
into an alien environment, making it easier at higher levels of integration to gain control and
therefore lower transaction costs (Buckley & Casson, 1998). Just as internationally operating
firms, regional firms might encounter these cost when operating in regions in which they are
not experienced and solely rely upon third-party options. Using this kind of organizational
structures may raise the possibility of opportunistic behavior and consequently, transaction
costs. Companies might higher control and lower transaction costs by hiring locally operating
sales managers.
Proposition 3a: Relational hazards that derive from subnational borders influence firm
performance due to the degree of network integration.
Differences in corporate cultures might raise the possibilities for opportunistic behavior (e.g.,
Ariño, De La Torre, & Ring, 2001; Chen, Peng, & Saparito, 2002). Ariño et al. (2001) argue
the importance of trust when dealing with different corporate cultures, which might lower the
possibility for opportunistic behavior and therefore, transaction costs. Chen et al. (2002) show
how cultural differences of even individuals can raise the possibility for higher transaction cost,
and that relatively small social groups such as organizations form their own identities as well.
These ‘corporate cultures’ are strongly influenced by the people that work for the corporate and
where they come from. When firms need to cross subnational borders, it might cause trouble
when two corporate cultures differ substantially, increasing chances on opportunistic behavior
and misunderstanding. Following these arguments, one can assume that the differences in
culture cause higher cost when crossing subnational borders.
Proposition 3b: Relational hazards that derive from subnational borders influence firm
performance due to differences in corporate cultures.
20
business coming from a different region. A higher aversion towards the ones that are concerned
as different attests a lack of trust.
Proposition 3c: Relational hazards that derive from subnational borders influence firm
performance due to a lack of trust.
Ownership structures refer to the extent to which a firm owns or controls a subsidiary in a
foreign market (e.g., wholly owned subsidiary or licensing) (Gomes-Casseres, 1994). While the
degree of interaction focusses on the integration of the firm in the external environment,
ownership structures focus more internally on firm-specific ownership structures and how these
structures higher or lower transaction costs (Nachum, 2003). While a wholly owned subsidiary
brings forward more control and thus lower transaction costs, it is at the other hand a risky and
expensive option for a market that is distant from the domestic market (Nachum, 2003).
Managing subsidiaries that are positioned across subnational borders might be harder to manage
because the employees might have, e.g., a different language. Arguably, subnational borders
might bring higher liabilities due to ownership structures when substantial (cultural) differences
are present or if due to differences between regions firms are forced to choose for an
intermediate form which increases the chance on opportunistic behavior.
21
2.4.4 Moderating LoF and Subnational Borders
Denk et al. (2012) found five drivers that moderate the identified LoFs. Since these drivers can
differ in their degree or level (i.e., cultural sensitivity, economic development, distance, firm
characteristics, and industry characteristics), they all have a different influence on the impact
on the three main hazards (unfamiliarity, discrimination, relational). However, due to the
research scope and scale, not every moderator is relevant and applicable. Firm characteristics
is an applicable and relevant moderating LoF when concerning the data sample.
The literature on the effects of firm characteristics (i.e., firm size, business group affiliations,
learning capabilities, management qualities) and LoFs is extensive (e.g., Calof, 1993; Wolff &
Pett, 2000). Authors find for instance that firms with a bigger size have an advantage in terms
of financial resources and so can enter distant markets with ‘heavier’ entry modes (e.g., wholly
owned subsidiary) (Calof, 1993). Since investigating all of the included firm characteristics lay
not within reach of this research and the firms included in this research are profoundly different
in terms of size and revenue, this research solely focusses on the moderating effect of firm
characteristics. It is expected that bigger firms in terms of employees and turnover are better
able to manage the unfamiliarity, discrimination, or relational hazards deriving from
subnational borders.
22
2.5 Outcomes of LoFs – impact on firm performance
Denk et al. (2012) provide an extensive list of how the identified drivers of LoFs affect firm
performance, also referred to as ‘business impact of internationalization.’ Just as national
borders bring forward these effects on firm performance, regional borders are arguably having
an impact too (regardless of the extent or level of impact). Eden & Miller (2006) use several
performance measures in their empirical work, i.e., profit growth, return on sales, and return on
assets. Within this research, the performance measures utilized by Eden & Miller (2006) are
directive, focusing on firm performance measures such as profit growth, sales performance, or
revenue.
2.6 Conceptual model
In this framework the collected literature and drafted propositions are summarized and
displayed;
Figure 3. Conceptual Framework influence subnational borders on firm performance Unfamiliarity Hazards
• 1a: Lack of embeddedness • 1b: Lack of regional experience • 1c: Lack of local knowledge
Discrimination Hazards
• 2a: External conformity pressures • 2b: Lack of local legitimacy • 2c: Limited access to resources
• 2d: Negative regional tendencies
Relational Hazards
23
III. Methods
3.1 Field Research
Interviews are conducted with 12 sales/commercial managers who are responsible for domestic
sales. The sales/commercial managers were contacted by email, telephone, or LinkedIn. An
essential condition for the selection of these managers is that they have or had experience with
sales in every or most of the regions of the country they are active in. Sales or commercial
managers are relevant in assessing and understanding the impact of subnational borders since
they are being held responsible for the sales performance of firms (performance measurement
for firm performance according to Eden & Miller, 2006). The managers are active in Europe,
in the following countries; the Netherlands, Belgium, Germany, Spain, and Italy.
Managers active in the food industry are selected since one of the characteristics of the food
industry is that its actors, arguably, have to deal more intensely with subnational borders that
derive from cultural differences (e.g., local food taste), political differences (e.g., local rules
and laws) or economic differences (e.g., regional price differences). When conducting the same
interviews within, e.g., the utility industry answers would have been assumingly different since
some of the differences mentioned above, such as local taste, are less relevant while other
differences might have been more influential.
The interviews are conducted in the language of the interviewee, in Dutch, English, and Italian
(except the German and Spanish companies). Moreover, the interview questions directly
derived from the literature, as described in the propositions. In order to inform the managers
about the meaning of the questions, the questions have been sent one week before the interview.
A small description of the questions is added as well, and the managers were able to contact me
when they did not understand the questions. Moreover, data concerning the revenue and FTEs
has been collected by the same email. Additionally, to higher the (construct) validity of my
questions, two test-interviews were held. One interview was held with a commercial director
with national sales experience (Wim Haarsma) and one with a master student at the University
of Groningen (Hidde Wedman). The interview protocol can be found in Appendix 3.
24
categories further, marking these categories with keywords. This meant that the marked
sentenced were labelled with keywords, that could be linked to the propositions and literature
as well. Lastly, ‘selective’ coding has been used to combine the categories for the results. This
meant that all the keywords of every answer to the questions were analyzed together in order to
formulate the result section.
3.2 Overview of companies and interviewees
Table 1. Overview of Data Sample
Name Type of
Company
Country &
Region
Date Length Function
Manager A Meat specialties producer
Noord-Holland, The Netherlands
12-04-2019
55 min. Commercial Director Manager B Bakery resource producer Zuid-Holland, The Netherlands 30-04-2019
45 min. Key Account Manager Manager C Meat specialties producer Gelderland, The Netherlands 10-05-2019
65 min. Sales Manager Manager D Meat & meat
products wholesaler Friesland, The Netherlands 16-04-2019
50 min. Commercial Manager
Manager E
Meat & silage producer Emilia-Romagna, Italy 07-05-2019 55 min. Marketing/Commercial director Salami products Manager F Meat specialties producer Lombardy, Italy 02-04-2019
40 min. Commercial Director Manager
G
Liquor Producer Piemonte, Italy 06-05-2019
35 min. Director (responsible for sales)
Manager H
Herb & Spices producer
Rheinland-Palts, Germany
30-04-2019
40 min. Sales Manager Manager I Gastronomy producer Nordrhein-Westfahlen, Germany 16-04-2019
50 min. Sales Manager
Manager J Meat specialities producer Oost-Vlaanderen, Belgium 18-04-2019
35 min. Sales Manager
Manager K
Pate producer Zuid-Limburg, Beligum
18-04-2019
50 min. Director (responsible for sales)
Manager L
Ham producer Andalusia, Spain 29-04-2019
25
IIII. Results
Unanimously the 12 interviewees noticed the effect of crossing subnational borders. The results
are elaborated by following the conceptual model, as illustrated in chapter 2.6.
4.1 Unfamiliarity Hazards & Subnational Borders
4.1.1 Lack of embeddedness
The interviewees have named a lack of embeddedness in the local culture as one of the main
drivers for extra costs. Companies that experience the consequences of a lack of embeddedness
were, for instance, not able to sell their products. Alternatively, these companies offered
products that did not match the local needs or needed to invest significant amounts of money in
overcoming these borders (e.g., by hiring local sales managers, adjusting products to the local
language or adjusting the price for a specific region). Manager D from a Frisian wholesaler
tried to sell typical Frisian products outside Friesland but sold none of them because people did
not understand and perceive the value of the products. Another Dutch manager C explained the
problem of a lack of local embeddedness in the following way; this company wanted to expand
sales in the ‘bible belt’ (religious region Zeeland/Zuid-Holland/Gelderland), and ‘offered
products that were from a better quality and even had a lower price, but these people stayed
attached to the suppliers that they would meet in church weekly’.
Concerning the examples above and the difficulties, the managers encountered due to a lack of
local embeddedness, subnational borders influence firm performance. A lack of local
embeddedness influences firm performance because companies find it harder to understand the
needs of the local consumer, cannot enter closed societies or need to raise their adaptability.
Not understanding local needs or the experiencing difficulties to enter certain regions due to
closed societies affect firm performance due to fewer sales while raising adaptability (e.g., by
hiring local sales managers) in order to manage information flows or ongoing operations bring
extra costs.
4.1.2 Lack of experience
26
products or services to it. Working with people that have local experience when crossing
subnational borders is a pré then.
Concerning the two (Italian) companies that do not have sales experience in the entire domestic
market, both companies are forced to make use of third parties since they do not possess the
financial resources and scale. Especially for the southern Italian regions, both companies
admitted it is hard to find a trustworthy third party. A lack of knowledge on the local market
and the knowledge on who can be trusted plays a vital role for these northern Italian companies
who want to expand south or for companies that already operate south (i.e., the big Italian
company encounters comparable issues).
Although the majority of the companies interviewed are experienced companies, they all made
clear that the experience they have built up over the years has been crucial when crossing
subnational borders. During the development of this experience, finding the right partners or
understanding the customer needs (local taste and preferences) can be tough. A lack of regional
experience consequently affects firm performance, since working with the wrong partners or
investing money to adapt and adjust in order to build up experience increases costs when
crossing subnational borders.
4.1.3 Lack of regional business & institutional knowledge
Starting business activities in regions that differ has been generally perceived by the
interviewees as hard (ten out of twelve). It takes time and requires regional experience and
adaptability to successfully build up relations and understand the local market when crossing
subnational borders. The three Italian companies perceived expanding to the south as ‘very
hard’ primarily because of local price differences. Manager F made clear that apart from the
cultural and political differences, economically seen expanding to the south ‘would mean that
we need to sell under cost price.’ Consequently, expanding to the south is almost impossible
for this company.
27
Most of the interviewees (nine out of twelve) did not perceive difficulties of any sort coming
from local political and or institutional borders; these companies state that they are only
influenced by the national law. However, the three companies operating in Italy do perceive the
influence of subnational institutional boundaries when expanding south. Manager E named
these borders, among others, as one of the reasons not to open any wholly owned subsidiary in
the south since ‘operating in Lombardy or Campagna are two different worlds.’ The influence
of the Mafia plays a role in this decision, but also bureaucratic processes that differ. According
to manager F in Italy, it might take one or two years to get all the permits necessary to start a
business in the north while in the south these could take up to three till five years.
Crossing subnational borders bring additional costs for starting and maintaining business
activities. Crossing subnational borders bring additional costs due to the effort that need to be
made to build up relationships with clients or organizational adjustments start and maintain
activities (e.g., local sales managers, adjusted promotion activities). A lack of local institutional
knowledge does not seem to be perceived as a border except in Italy.
4.1.4 Overview Unfamiliarity Hazards
Table 2. Overview results influence of unfamiliarity hazards on firm performance
Unfamiliarity Hazards
Effect of subnational border
Effect on Firm Performance
• Lack of local
embeddedness
-Difficulties to enter closed
societies
-Hard to understand local
needs
-Organizational investments to
raise adaptability (local sales
managers, third parties)
-Fewer sales, because unable to
enter certain ‘closed’ societies
• Lack of experience
-No local network
-Lacking knowledge about
local needs, inability to adjust
-Costs to build up experience,
invest in the market
-Working with wrong partners
bring costs
• Lack of institutional
knowledge
- Lack of knowledge about
local ‘way of business.’
-Differing local (political)
institutions impede business
activities
28
4.2 Discrimination hazards & Subnational borders
4.2.1 External conformity pressures
Adjusting to regional differences and preferences has been named as one of the most significant,
if not the most significant, factor that derives from subnational borders. The interviewed
companies dealt with big local differences and preferences and mentioned numerous examples
which testify how significant differences within a country are on a matter of taste (culture) and
economy (price differences and purchasing power of consumers). Besides, the necessity to work
with people with local knowledge kept returning as a feature of adapting to conformity
pressures and high local responsiveness.
An interesting pattern in the results is that the most prominent companies were only able to
adjust to small regional differences providing that they need to sell a minimum volume to be
profitable. Furthermore, these bigger companies adapt advertisements and promotional
activities to the regional differences and preferences they perceive. They spent additional costs
to promote these products because, according to Belgian manager J, the company knows ‘that
in certain areas products just do not sell well due to regional preferences, and so we focus our
advertisements/actions on certain products that do work well regionally.’
When crossing subnational borders, companies need to adjust their etiquettes, ingredients,
promotional activities, or hire local sales managers when a company aims for increasing sales.
If not, the respondents perceive fewer sales or even no sales at all. Consequently, subnational
borders influence firm performance due to external conformity pressures.
4.2.2 Lack of local legitimacy
In line with the adjustments to regional differences and preferences, companies notice that
especially on a product (portfolio) level, there is a difference in the acceptance of products due
to subnational borders. According to Manager D, ‘it takes time to build trust’ when crossing
subnational borders, and the ability to offer products that are regionally accepted will help to
gain trust.
29
the assortment of a (large) local catering wholesaler. Every candidate hands in their ‘competing’
product anonymously. The company from Noord-Holland won the prize, as one of the few
producers not originating from Limburg. Because of that, the wholesaler did not include their
product since they only accepted locally produced cooked-hams.
This example of manager A shows that subnational borders may cause discrimination, simply
because in this case, the company did not belong to ‘us.’ Several companies encountered these
issues since sales within the food & beverage industry are highly price (economic) and taste
(culture) dependent. Nonetheless, most of the respondents did not perceive discrimination based
upon the fact that ‘they originated from a certain region or area.’ The managers did give many
examples which showed that their products or services did not get accepted because they did
not fit with the local preferences and tastes, but the willingness to conduct business always
remained. When companies cannot gain local legitimacy or when companies (and their
products/services) are perceived as distant due to subnational borders, this will negatively
influence firm performance.
4.2.3 Limited access to resources
Nine out of the twelve interviewees did not perceive any difficulties in having limited access to
resources due to subnational borders. Four out of these nine companies crossed subnational
borders by opening wholly owned subsidiaries in different parts of their domestic countries, but
never have perceived any difficulties deriving from subnational borders. When crossing
subnational borders, not every respondent perceived limited access to resources. It is harder to
find the right strategic partners, but it does not impede business because they are from a specific
region.
What these nine out of twelve interviewees did perceive as a general pattern is the effect of
regional economic differences and the effect on the employment rate. For example,
unemployment rates are very high in Wallonia (Belgium), while the unemployment rates in
Vlaanderen are meager. This causes that it is generally hard to get ‘good’ employees in
Vlaanderen while in Wallonia it is typically straightforward. This is a general economic
tendency (something recurrent but not always present) that most of the interviewees named,
none of them perceived this as a subnational border influencing firm performance.
30
it is hard to find reliable partners. It is not clear who can be trusted. Interviewees named the
presence of the Mafia, a different mentality, weak economic development (price differences)
and, differing tastes as vital subnational borders causing limited access to resources. Especially
the presence of a different mentality in the south of Italy is causing that it is tough to find the
‘reliable’ employees. It has been named as one of the reasons why none of the interviewed
companies would open or possesses a wholly owned subsidiary in the south. Manager F
described mentality differences (cultural differences) in the following way; ‘Italy is with the
head in Europe, but with the feet in Africa.’ This Italian way of saying cannot be taken for
granted, but it does symbolize the way people perceive ‘us’ (northern Italians) and ‘them’
(southern Italians).
Limited access to resources is generally not perceived as a liability that harms firm performance
significantly. The results coming from Italian respondents differed from the others in the sense
that northern Italian companies do perceive limited access to resources within Italy.
4.2.4 Negative regional tendencies
31
4.2.5 Overview Discrimination Hazards
Table 3. Overview results influence of discrimination borders on firm performance.
Discrimination Hazards
Effect of subnational border
Effect on Firm Performance
• External Conformity
Pressures
-Inability to adjust to local
needs and preferences due to
scale disadvantages
-Local demand highly taste
dependent, nationally a lot of
different local tastes and
preferences
-Extra costs to adjust products
(etiquettes, ingredients etc.)
-Unable to sell due to scale
disadvantages
-Costs to adjust local
promotional activities
• Lack of local
legitimacy
-‘Us’ and ‘them’ thinking
-Not accepted, principally on
product level since products
offered are not fitting local
taste and preferences
-Requires organizational
investments (e.g., local sales
managers) to gain legitimacy
-Requires investments to adjust
products to get ‘accepted.’
• Limited access to
resources
-Hard to find the ‘reliable’
employees
-Regional economic
differences
-Costs for the recruitment of
employees
-Investments in finding
strategic partners
• Negative regional
tendencies
32
4.3 Relational Hazards
4.3.1 Degree of network integration
Several companies made use of local distributors or wholesalers in combination with local sales
managers or solely used local distributors or wholesalers because these companies do not have
the (financial) resources to hire local sales managers. Just as local sales managers function as
an appliance to lower the effects of a lack of local embeddedness on firm performance. Local
distributors or wholesalers function the same, apart from the fact that, according to the
interviewees, one will have less control over its sales and these companies are less focused on
the products a company is offering (they are less integrated into the local network). This might
raise the chance on opportunistic behavior and therefore transaction costs. However, none of
the respondents had bad experiences with third parties or noticed opportunistic behavior.
Seven out of twelve companies noticed significant barriers that they decided to highly
integrated into the local network by hiring local sales managers. Manager H justified hiring
local sales managers because they have ‘local knowledge and the skills to overcome
communication barriers.’ Furthermore, local sales managers enlarge the adaptability to local
differences which have been unanimously named as a critical factor to get integrated within a
local network and so expand business within regions that differ. Additionally, some managers
made clear that further control over the market with local sales managers has been another
reason to fully integrate into the market and not make use of third parties. Generally, all of the
relatively bigger companies within the data sample make use of local sales managers. Hiring
local sales managers do bring extra costs, but according to the interviewees, the rewards are
much more significant. For a smaller firm, the investment in local sales managers will have a
larger impact on firm performance than for bigger firms.
4.3.2 Different corporate cultures.
33
Companies without local sales managers either serve another type of channel, mainly the
headquarters of big retail parties or catering companies (manager A, C, F), or do not possess
the financial resources to hire local sales managers (manager G, K). Companies that do visit
mainly headquarters or big distributors generally perceived that few liabilities are coming
forward from different corporate cultures. According to these managers, most employees of
these headquarters are from mixed backgrounds as well, and some even match local sales
managers with purchase managers that are from the same region. However, the two companies
(manager G, K), that do not possess experience within every region of the country and lack the
financial resources to hire local sales managers did not necessarily encounter more liabilities,
since they are mainly active in their region of origin or close to the origin. Thus, they do not
cross subnational borders regularly and therefore are less experienced with different corporate
cultures.
The results did not signify that dealing with different corporate cultures form significant
borders. Yes, there are some differences, also in a matter of trust, but different corporate cultures
within countries have not been perceived generally as a significant subnational border that
influences firm performance.
4.3.3 Lack of trust
When crossing subnational borders, the respondents made clear that it takes more time to build
up trust. This may be again explained by the ‘us’ and ‘them’ perspective. The respondents did,
however, noticed some differences regarding the constructs of these subnational borders.
Managers active in the Netherlands noticed that subnational borders are mainly formed in the
Randstad by economic borders. Clients within these areas are more likely to switch of suppliers
when they can get a better price. Multiple managers from different countries supported this
statement, stating that due to a more individualistic lifestyle, a higher concentration of
competitors, and higher economic development clients within wealthier regions are more likely
to switch suppliers and therefore become less reliable.
34
tendencies). It may cause that it takes longer to gain trust, and therefore raise costs, but it
eventually does not impede the willingness to do business.
4.3.4 Ownership structures
35
4.3.5 Overview Relational Hazards
Table 4. Overview results influence of discrimination borders on firm performance.
Relational Hazards
Effect of subnational border
Effect on Firm Performance
• Degree of network
integration
-Forces companies to work
with parties that possess local
knowledge and experience
(e.g., third parties or local
sales managers)
-Investment in the recruitment
of local sales people to
integrate into the network
-Third parties need to spread
focus, therefore fewer sales
then potentially possible
-Possibilities on opportunistic
behavior, however not
experienced
• Different corporate
cultures
-Differences in conducting
business and trust
-Hardly any significant effects
have been named
• Lack of trust
-Takes longer to build up trust
-‘Us’ and ‘them’ thinking,
‘them’ might be perceived as
distant
-Investment in organizational
adjustments to gain trust and
therefore sales (local sales
managers, local third parties)
• Ownership structures -Some companies opened a
wholly owned subsidiary
because of transportation,
production, or financial
reasons. Transportation is
mainly related to subnational
borders, but highly country
dependent.
36
4.4 Moderating effect – Firm Size
Three groups can be distinguished within the data sample; small companies (5-30 employees,
1-4 million revenue), medium-sized companies (70-250 employees, 35-50 million of revenue),
and large companies (600-20.000 employees, 250 million – 4.2 billion revenue)(revenue in
euros). Within these three groups, one can see an evident tendency on how firms experience the
impact of subnational borders. The interviewees were asked to give a subjective score on a scale
from 1-10 (one smallest impact, ten the largest impact) on the difficulty of managing
subnational borders and the impact consequently on firm performance. Every company
experienced the impact differently, but connecting this score to firm size (FTEs and total
revenue) creates some apparent patterns.
The smallest enterprises perceived managing subnational borders and its impact on firm
performance as the hardest with an average score of 6. These companies do not have the
financial resources to hire employees, and moreover, do not possess the network and knowledge
that is necessary when crossing subnational borders. An interesting finding is that the biggest
companies rated managing subnational borders encountered more difficulties in managing
subnational borders and their impact (average of 4) than the medium-sized companies (average
of 3.2).
Table 5. Firm Size and difficulty/performance score.
Name Type of Company FTE Revenue
in €
Score difficulty & impact firm perf.
Company B
Bakery resource producer
18.510
4,2 billion 4
Company E
Meat & silage producer
8000
3 billion
7
Company J
Meat specialties producer
20.000
2 billion
3
Company H
Herb & Spices producer
800
400
million
4
Company I
Gastronomy producer
600
250
million
2
Company A
Meat specialties producer
250
40 million 3
Company K
Pate producer
80
40 million 4
Company L
Ham producer
80
50 million 1
Company C
Meat specialties producer
70
40 million 3
Company D
Meat & meat products wholesaler
70
35 million 5
Company F
Meat specialties producer
30
4 million
7
37
Smaller companies found it generally harder to cross subnational borders since they do not
possess financial resources and local knowledge to do so. Moreover, when crossing borders, it
might mean that these small companies need to make use of local sales managers or to work
with third parties that show differences and that would mean a large investment for such small
companies. With the smaller workforce, it is harder to manage subnational borders since small
companies do not have local sales managers that can lower subnational barriers and they possess
knowledge and experience about which (third) party to trust. Bigger firms indeed have more
financial resources to expand and manage domestic sales, but do not necessarily find it easier
to manage these difficulties, also illustrated by the scale scores.
Firm size does have a moderating effect. Smaller firms need to invest more (relatively to their
budget) to cross subnational borders compared to big companies. Moreover, smaller firms lack
the financial resources that enable companies to manage subnational borders. However, bigger
firms crossing subnational borders do not necessarily encounter fewer liabilities from the
identified hazards which becomes visible in the relative, subjective score bigger companies (4)
gave to the difficulty of crossing a subnational border and its impact on firm performance
compared to medium-sized companies (3.2).
Moderating LoF Effect of subnational border Effect on Firm Performance
• Firm Size
-Unfamiliarity,
Discrimination and
Relational Hazards as
previously described
-With increasing firm size
companies obtain more
resources to manage
subnational borders, smaller
firms need to invest
38
