INDIANAPOLIS, Ind.—The term “global company” may insinuate far-reaching manufacturing and distribution of goods and services around the globe. But the majority of businesses operate within their own regional backyards.
“Most companies tend to use the term ‘global,’ but when you really look at data and the extent of a company’s operations, more than 90 percent operate within a very small geography,” explained Charles Dhanaraj, Schmenner Faculty Fellow and associate professor of management at the Kelley School of Business Indianapolis.
Dhanaraj examines the reasons firms do not expand globally in a paper titled “Home Region Orientation in International Expansion Strategies,” which was accepted recently for publication in the Journal of International Business Studies. Dhanaraj co-authored the research with Elitsa (Ellie) R. Banalieva, an assistant professor at Northeastern University, and a doctoral student from Kelley School of Business.
The paper offers an explanation as to why some companies succeed globally while most remain regional. Specifically, their findings reveal that technology and institutional diversity are at the core of that success.
“Companies have different types of advantages,” Dhanaraj explained. “Companies that are very good at technology seem to have much broader scope and much broader geography than companies that are weaker in technology. For example, the Apple iPhone is an Apple iPhone everywhere. You might change Chinese or English software, but there’s not much adaptation that you have to do. Adaptation costs decrease as the technology increases.”
Likewise, entering a global market that is as institutionally similar to company’s home market also is an indicator of international success.
“For instance, consider the legal system in which the markets work,” said Dhanaraj. “To some extent, they become a proxy of how risky the markets are. So a U.S.-based company is more familiar with the institutional context of the United States. If that company wanted to expand internationally, the cost of doing business in a similar institution like Canada might be much cheaper compared to the cost of doing it in a very different institution such as India.”
If a company is strong technologically, that can make up for market, legal or financial differences.
“With a high level of technology, you might be able to bear through all the differences in the institutions. That’s the very simplistic concept.”
The research focused on companies from ten developed countries such as the U.S. and Japan. Its findings can help companies decide whether or not they should move beyond their borders and if so, how far.
“When looking at geography, many companies think Mexico or Germany,” said Dhanaraj. “So we are saying, assess your own technological strength. If your technology is very strong then you are better off considering a global strategy. If you’re not as technologically advanced, think more regional; your profitability will be much better.”