Does Institutional Theory Explain Foreign Location Choices in Fragmented Industries

ABSTRACT Fragmented industries are fundamentally different in terms of their structure and competitive landscape yet these industries have been neglected by much of the existing literature. In a sample of 90 countries and using the fragmented real estate industry, I empirically test Institutional Theory using Probit Regression in the context of international location choice and find that Institutional Theory is supported in this context. Three variables-GDP, Uncertainty Avoidance and Regulatory Quality-are found to be most significant. Additionally, a key finding is that firms in fragmented industries help to legitimatize countries in addition to other competing firms. Keywords: Location Choice, Institutional Theory, Fragmented Industries (ProQuest: ... denotes formulae omitted.) INTRODUCTION There has been a comprehensive review in the International Business (IB) literature on the behavior of firms in concentrated industries and their expansion across national borders. Beginning with the Harvard Multinational Project in the 1 960s, IB scholars such as Raymond Vernon and Frank Knickerbocker posited that oligopolistic industries were prone to make aggressive-defensive moves in order to maintain the equilibrium in the subject industry. As such, and because these firms had a valuable position to protect, the decision for foreign direct investment (FDI) was reactionary for many firms. The focus of these studies was not only industries that had oligopolistic tendencies but that were also involved in manufacturing. This combination of highly concentrated, or oligopolistic, industries and manufacturing concerns was logical for the time since most data that was available to academics were of this sort. One problem with the study of that type of industry makeup is that it represents only a fraction of businesses that operate in the United States. As manufacturing has been displaced overseas, the U.S. economy has become ever more service oriented (Department of State Website 2006). Scholars, however, have not moved with the changing economy as many current studies are interested in diminishing industry structures. Certainly I am not arguing that these industries are irrelevant; instead, the point is that IB needs to incorporate more diverse sets of industry populations even if data collection and theory building is more difficult in this environment. The central question of this study, as it pertains to international business scholarship, is why do firms that are in fragmented industries compete away from their home country? In other words, it can be completely understood why firms in highly concentrated industries move overseas as they must compete with their few major competitors. However, it is not so evident why firms in fragmented industries would do so. Theoretically, fragmented industries have numerous small sellers who, in many cases, do not compete directly for the same buyer's business. Following on this point, tit for tat moves are not common in highly fragmented space yet many of these firms still operate on the worldwide stage. This study will focus on the Real Estate industry as a test case for fragmented industries for several reasons.. First, real estate is a highly fragmented industry (U.S. Census Bureau 2008; Ahluwalia and Chapman 2000; Forgey et. al. 1 996; Frey 1 996; Mahajan 2006; Porter 2003) nearing perfect competition. Even in sub-industries within this broad category (i.e. operative homebuilders, brokerage firms, construction, hotels, etc), one cannot find highly concentrated activity. Secondly, the real estate industry, being in the service sector, can give academics and practitioners a new angle on FDI. With these points in mind, I will focus on real estate firms that are based in the United States and have expanded internationally in order to discern what country characteristics are present for fragmented industry participants to enter. Therefore, in additional to fragmentation as a key topic, location choice will be the outcome studied. …