The Unbalanced Geography of the World's Largest MNES: Institutional Quality and Head Office Distribution Across Countries

• Author: Regis Coeurderoy,Alain Verbeke
• DOI: http://doi.org/10.1002/gsj.1118
• Published date: 01 May 2016
• Date: 01 May 2016

THE UNBALANCED GEOGRAPHY OF THE WORLD’S

LARGEST MNES: INSTITUTIONAL QUALITY AND HEAD

OFFICE DISTRIBUTION ACROSS COUNTRIES

REGIS COEURDEROY

1,2

and ALAIN VERBEKE

3,4,5

*

1

ESCP Europe, Paris, France

2

Louvain School of Management, Université Catholique de Louvain, Louvain la

Neuve, Belgium

3

Haskayne School of Business, University of Calgary, Calgary, Alberta, Canada

4

Henley Business School, University of Reading, Reading, U.K.

5

Solvay Business School, University of Brussels (VUB),Brussels, Belgium

INTRODUCTION

In the post-World War II period, large firms—in

particular the world’s largest multinational enter-

prises (MNEs)—have been instrumental in integrat-

ing national economic systems in the world

economy (Dunning and Lundan, 2008). Whether

through a conventional, hierarchical ‘M-form’

(Chandler, 1962; Williamson, 1985) or a ‘global

factory’organizational approach (Buckley, 2009,

2011, 2012), the corporate head office plays an im-

portant role in MNE governance. The head office

typically acts as supposed ‘intelligence controller’

or, at least, ‘resource orchestrator’for a large num-

ber of internal and external contracts (Birkinshaw

et al., 2006; Hillemann and Verbeke, 2014).

Empirical evidence suggests that for the largest

firms, including many MNEs owning or controlling

assets throughout the world, the corporate head office

(which determines the nationality of a company)

mostly remains located in the country where the

company was initially created, i.e., in the original

home base, irrespective of the firm’s subsequent

growth in geographic footprint(Baaij, Van den Bosch,

and Volberda, 2004).

Being a home country for a substantial, aggregate

number of large firm head offices is desirable for

national governments because of thesupposedly close

linkages this home base status generates between

political and business spheres (Dunning and Lundan,

2008; Murthaand Lenway, 1994). A country’sability

to function as the permanent locus (or later-life one)

for the home base of large corporate head offices

could be interpreted in general terms as the tangible

expression of a nation’s well-functioning economy

and institutions. The question does arise, however, as

to which specific parameters contribute to a nation

operating as the home base for a high(er), aggregate

number of very large firms.

Michael Porter (1990: 1) brought this issue to the

forefront in his seminalbook on country competitive-

ness by asking ‘why does a nation become the home

base for successful international competitors in an in-

dustry?’In the present article, we augment Porter’s

question about country capabilities in international

competition with a closely related, but substantively

different, question: ‘why do we observe some nations

having a concentration, in aggregate numberof corpo-

rate head offices, of firms that rank among the largest

in the world?’Portersought to assess home base char-

acteristicsleading to international successat the indus-

try level, thereby focusing on the interactions among

four ‘diamond’determinants in each sector (factor

conditions;demand conditions; relatedand supporting

Keywords: multinational enterprise; head office; corporate

headquarters; location; institutional quality; corporate

headquarters; Porter’s Diamond; double diamond; country

competitiveness

*Correspondence to: Alain Verbeke, Haskayne School of Busi-

ness, Univers ity of Calgary, 2 500 University D r., Calgary,

Alberta, T2N 1N4, Canada. E-mail: averbeke@ucalgary.ca

Global Strategy Journal

Global StrategyJournal, 6:127–148 (2016)

Published onlinein Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/gsj.1118

Copyright © 2016 Strategic Management Society

industries; strategy, structure,and rivalry). In contrast,

we focus on broader country-level characteristics that

are relevant to a country functioning as the home base

for large firms across industries. In addition, whereas

Porter focused primarily on initial conditions to

explain the rise of successful industries, we are inter-

ested mainly in present conditions that allow countries

to accumulate supposedly footloose, corporate head of-

fices of the world’s largest firms within their borders.

We assume in our article that head offices are poten-

tially footloose for three reasons. First,thecostofa

large MNE head office is typically low as compared

to the company’s overall cost structure. In addition,

many high cost items, such as CEO and senior manage-

ment compensation, are largely independent of

location, whereas the remaining cost items either

embody permanent value (such as firm-owned real

estate) or are associated with productivity in line with

costs (such as high level administrative staff). Second,

the benefits of head office activities to the MNE would

appear to be at least partly location independent: things

like making sound decisions on governance and strat-

egy, including establishing the boundaries of the firm,

and setting limits to product and market diversification

do not require a specific, unique location (except in

the case of government-owned firms). The corporate

head office is primarily an information processing and

decision-making command center in the firm’sgover-

nance structure, whereby at least some foreign locations

would typically provide attractive venues for such activ-

ities. Third, in line with internalization theory thinking,

most of the world’s largest firms now operate as ‘global

factories,’wherein both the ownership status and the lo-

cation of fine-sliced value chain activities are reassessed

on a continuous basis. Especially within the population

of the largest and most successful firms, both the own-

ership status and location of specific value chain activi-

ties are typically contestable/moveable so that the

observed governance of each activity can reasonably

be interpreted as being efficient from a comparative in-

stitutional perspective (Hillemann and Verbeke, 2014;

Narula and Verbeke, 2015).

There is a paucity of empirical research on the

global distribution of MNE corporate head offices,

even though having such offices ‘at home’appears

to be an explicit policy objective of many govern-

ments at the nation al and even city levels (McKinsey,

2010; CED, Calgary Ec onomic Development, 2010).

Here, little attention has been paid to the parameters

explaining the capacity of any nation to function as

the home base for a large aggregate number of MNE

head offices.

We attempt to answer our research question

through the analysis of the Forbes’list of the 2,000

largest publicly heldfirms in the world,

1

which iden-

tifies the head office location (as legal domicile) of

each firm. Three observations can be made when

looking at these data. First, a small number of coun-

tries from the triadof the European Union, the United

States, and Japan serve as the home of most MNE

head offices.Seco nd, emerging cou ntries, the BRICs

2

in particular,now represent a substantial proportion of

MNE head offices. In the 2009 Forbes ranking

(figures on corporateresults for the year 2008),64 per-

cent were located within the triad countries. Note,

however, that these countries represented 77 percent

in the ranking published five years before. Firms with

head offices in the triad countries have had to make

space for newcomers from emerging countries. After

2000, China and other emerging economies have

become the home base of an increasing number of

MNEs in the top 2,000. BRICS headquartered firms

accounted for 11 percent of the top 2,000 in 2008

versus five percent, five years before. Similarly, other

countries in the rest of the world have entered the

league: there were companies headquartered in 51

countries in the ranking in 2004, as compared to 62

countries in the 2 009 ranking. Third, less than one-

third of the countries included in the analysis function

as the home of thehead office to at least one top 2,000

company. More specifically, 143 countries out of the

205 in the database used in the present article do not

(yet) serve as home base to a single, large MNE head

office and, thus, are excluded from this premier league.

The questionarises as to whether particular country

characteristics contribute significantly to explaining

these observations. Inspired by contemporary work

on the importance of macro-level governance and in-

stitutions (Coeurderoy and Murray, 2008; Dunning

and Lundan, 2008; La Porta et al., 1999; Kaufmann,

Kraay, and Mastruzzi, 2010), we hypothesize that a

country needs to ach ieve a threshold level of economic

development and institutional stability for it to func-

tion as the home of at least one large firm head office.

In regard to the capability to function as the location

for a more substantial, aggregate number of large

MNE head offices, we hypothesize that a higher

1

In the present article,we use the Forbes 2000, a ranking of the

largest publicly owned companies in the world. This listing is

the most extensive one published today in terms of number of

firms involvedand the scope of parameters used to classifythese

firms accordingto their importance.

2

Brazil, Russia,India, and China.

128 R. Coeurderoy and A. Verbeke

Copyright©2016 Strategic ManagementSociety Global StrategyJournal, 6:127–148 (2016)

DOI: 10.1002/gsj.1118