Playing Football on a Soccer Field: Value Chain Structure, Institutional Modularity and Success in Foreign Expansion
63 Pages Posted: 26 Nov 2008
Date Written: December 26, 2005
When do firms expand abroad? Theory to date suggests that global expansion happens when firm-specific competitive advantages outweigh country-specific difficulties in operating abroad. Differences in culture, in legislation, in administrative practices, and in the overall institutional structure, all of which operate at the level of the country, have been extensively studied as factors affecting global expansion. We suggest that in addition to these country-level factors, a major determinant of the prospects and potential for global expansion is the structure of the value chain, which is both country- and sector- specific. Value chain structure, i.e. the way that labor is divided between different types of vertical participants evolves in a path-dependent, country-specific way. Differences in vertical structures between countries, then, predict the extent to which firms in any segment can export their competitive advantage. Thus, for globalization to occur, firms must have an "institutionally modular" product or service; that is, a product or service which "fits" in the vertical structure of the sector of the host country. We argue that such "institutional modularity" is not easy to achieve. We illustrate with evidence of globalization efforts in mortgage banking that largely failed because of either lack of compatibility of the globalizing firms' "vertical module", or because of the managerial underestimation of the role of vertical co-specialization. We also note that the increasing modularization and global convergence of value chain structures (partly motivated by gains from trade and partly motivated by IT standards) may be opening up new venues for globalization, especially in the service sector.
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