THE EFFECTS OF HOME COUNTRY POLITICAL AND LEGAL INSTITUTIONS ON FIRMS' GEOGRAPHIC DIVERSIFICATION PERFORMANCE

Plain language summary: Managers of multinational firms often view the political and legal environment as an important driver of international performance. However, this view is normally directed toward the host country rather than the political and legal environment within the home country. This study focuses on the home country environment and finds that a stable political environment increases the effectiveness of a firm's overseas expansion efforts, even as it reduces overall firm performance. Meanwhile, an effective legal environment at home strengthens the effectiveness of a firm's overseas expansion efforts and overall firm performance. As such, the origin of a firm matters, as it influences a firm's ability to be successful. This has broad implications for managers and policy makers. Technical summary: This study proposes that we need to examine jointly the direct and indirect effects of home country political and legal institutions on the performance of geographically diversified firms. We contend that home country political stability and regulatory effectiveness work through different mechanisms in influencing firms' performance directly and indirectly through their geographical diversification strategies. Specifically, we hypothesize that home country political stability directly reduces firm performance, but positively moderates the relationship between geographic diversification and performance. Meanwhile, we hypothesize that home country regulatory effectiveness directly enhances firm performance and positively moderates the relationship between geographic diversification and performance. The findings, based on more than 33,000 firm-year observations from 33 home countries, support our hypotheses on home country political stability and regulatory effectiveness. Copyright (C) 2016 Strategic Management Society.