Firm Heterogeneity and Performance in a Turbulent Economic Environment: Evidence from Greece

• Date: 01 June 2018
• Published date: 01 June 2018
• DOI: http://doi.org/10.1111/emre.12144
• Author: Keith W. Glaister,Antonios Georgopoulos

Firm Heterogeneity and Performance in a

Turbulent Economic Environment: Evidence

from Greece

ANTONIOS GEORGOPOULOS

1

and KEITH W. GLAISTER

2

1

Department of BusinessAdministration, University of Patras, Patras, Greece

2

Warwick Business S chool, The Universit y of Warwick, Coventr y, UK

We examine the explanatory power of foreign ownership and domestic multinationality on firm performance

among three different groups of sample firms over a turbulent economic period drawing on a unique dataset from

Greece. Although the performance of each group of firms declines during the economic recession, we find that

comparedto Greek non-multinationalenterprises (MNEs), foreign-owned firms showa profitability advantage,albeit

at a lower profit performance level, and a much higher sales growth performance, considerably smoothing out

fluctuations in sales. In turn, over the recession Greek MNEs donot achieve better performance compared to Greek

non-MNEs, eitherin terms of profitability or of sales growth. Thisfinding runs counter to the predominantview that

the domestic multinationality factorper se matters, and prompts the need for future research to address particularly

the performance impact of new multinationals from small and emerging economies. Hence, we suggest that neither

domestic ownership nor domestic multinationality can boost firm performance in turbulent years.

Keywords: Foreign-owned firms; domestic multinationals; domestic non-multinationals; performance outcomes;

recession effects; Greece

Introduction

A growing stream of international business (IB) and

management literature focuses on firm heterogeneity and

its impact on performance (e.g., Bellak and Pfaffmayr,

2002; Mata and Portugal, 2002; Bellak, 2004). Firm

heterogeneity may arise from factors such as foreign

ownership and domestic multinationality, where foreign

ownership involves foreign-ownedfirms in a specific host

country, while domestic multinationality concerns

indigenous firms with international business operations

over different host countries. Such heterogeneous

groups of firms might exhibit differing competitive

abilities to operate in a particular local market, which

can lead to performance asymmetry. Moreo ver, a drastic

deterioration of contextual conditions under which firms

operate might cause strong economic recession effects

with an imprecise performance outcome.

When making performance comparisons, a typical

business differentiation of heterogeneous enterprises is

that between foreign-owned and purely domestic-owned

firms. A standard perspective is that foreign firms must

possess a countervailing advantage(advantages of foreign

ownership) over local competitors, which have better

informationabout their own countrysufficient to outweigh

the liability of foreignness (LOF) (Zaheer, 1995). Hence,

ownership and internalization advantages must be

balanced against the LOF (Hymer, 1960; Dunning, 2000;

Kronborg and Thomsen, 2009). The literature reveals

several performance gaps between foreign-owned firms

and purely domestic enterprises, for example, in

profitability and growth (for a literature review of such

gaps see Bellak, 2004), often hypothesizing a systematic

superior performance of foreign-owned firms (Willmore,

1986; Kumar, 1990; Dunning, 1993; Bellak and

Pfaffermayr,2002; Chang et al., 2013). We note that prior

literature(e.g., Bellak, 2004; VanBeveren, 2007; Temouri

et al., 2008; Varum and Rocha, 2011) uses terms such as

‘foreign firms/ mul tinational enterp rises (MNEs)/pl ants’

when investigating the ownership effect on performance

and comparing foreign-owned with domestic companies.

European Management Review, Vol. 15, 237–254, (2018)

DOI: 10.1111/emre.12144

Correspondence: Antonios Georgopoulos, Department of Business

Administration, University of Patras, University Campus, 26504 Rio,

Patras, Greece, Tel: +30 2610 996139; Fax: +30 2610 996139. E-mail:

georgop@upatras.gr

©2017 European Academy of Management

In our analysis foreign-owned firms are subsidiaries of

foreign MNEs operating in the domestic economy and

domestic companiesare Greek non-MNEs.

Recently, as domestic enterprises exhibit a growing

degree of heterogeneity due to internationalization, a

further differentiation within the group of domestic firms

has been made, leading to a comparative performance

analysis between domestic MNEs and domestic non-

MNEs (e.g., Temouri et al., 2008). Some studies give

more weight to gains from multinationality per se due to

internalization advantages and transfer and organization

of firm-specific assets within the intra-firm network

(Dunning, 1993, 2000) which can reduce the risk

premium of international operations and increase the

performance premium correspondingly. However, other

studies provide a different picture challenging the general

positive effects of multinationality (e.g. Contractor et al.,

2003; Verbeke and Brugman, 2009; Powell, 2014).

It is notable that IB research has largely ignored the

investigation of the impact of distinct firm characteristics

on firm performance under radical external change

(Keister, 2002; Perez-Batres and Eden, 2008). However,

over time as the different groups of firmscompete against

each other, the possibility of a radical environmental

change within a specific national context substantially

increases, undermining firm performance. This

phenomenon has been described by Perez-Batres and

Eden (2008) as the liability of localness (LOL). In

particular, LOL is expressed in external crisis effects that

suddenlyoccur and can challenge the competitive strength

of all groups of firms which operate in the same local

environment. Based on the LOL approach, we suggest

that a change in performance might stem from both the

internal firm environment (e.g., ownership structure,

multinationality) and the external context as well.

Relatively few studies have explored the performance

gaps of heterogeneous firms under deteriorating external

conditions and especially under the impact of the recent

financial crisis. Those that have fall into several types:

studies that concentrate on the foreign-owned vs.

domestic comparison (e.g., Varum and Rocha, 2011),

comparativeinvestigations of survival (Alvarezand Görg,

2009; Godart et al.,2012; Georgopoulos et al., 2014),and

studies thatinvestigate heterogeneousresponses of several

types of foreign ventures to the changing economic

environment (Belderbos and Zo u, 2007).

Here the central question raised is whether the

LOL differentiates further performance and how firms

react to environmental deterioration. In this framework,

we explore whether firm-specific advantages such as

foreign ownership and domestic multinationality can

reverse the adverse performance effects of recession.

Taking into account the diversity and heterogeneity of

performance (Roper, 1999; Nakano and Kim, 2011),

we focus on two of its main elements, that is, profitability

and growth (dependent variables) and correspondingly

develop two separate groups of hypotheses for the two

specific performance indices.

The study contributes to the performance literature in

several ways. First, unlike many other prior studies that

concentrate either on the ownership or multinationality

factors, we integrate both factors in our analysis and

explore their relative performance impact. As regards

foreign ownership, there is controversy over the relative

advantage of foreignness and the liability of foreignness,

with a presumed advantage of the former. Also, there is

no unambiguous insight of its role during economic

recession. Some prior survival studies report a similar

pattern of firm r eaction to economi c crisis effects

(e.g., Godart et al., 2012), Alvarez and Görg (2009) find

that market-oriented foreign-controlled firms are affected

more by a negative shock than indigenous enterprises,

whereas Varum and Rocha (2011) support the view that

foreign-owned firms are less affected by an economic

crisis. Moreover, it is not clear that domestic

multinationality improves firm performance since there

is a growing body of IB literature that challenges apriori

advantages of multinationality with recent research being

somewhat ambiguous as regards a linear relationship

between multinationality and performance (e.g.,

Contractor et al., 2003) and the optimal level of

multinationality (Powell, 2014). Additionally, such

research has tended to focus more on firm survival rather

than on profitability and growth (Van Beveren, 2007;

Alvarez and Görg, 2009; Bandick, 2010). Furthermore,

recent literature presents controversial arguments on the

performance role of MNEs in a turbulent environment

(for a literature review see Varum and Rocha, 2011).

In general, this study enriches the IB and management

literature by investigating how foreign ownership and

domestic multinationality affect the performance of

foreign-owned firms, domestic MNEs and domestic non-

MNEs in the small open Greek economy, comparing the

specific groups of firms in pairs. Our empirical analysis

reveals the relative performance contribution of foreign

ownership and domestic multinationality in the total

investigation period (2002–2016). More importantly, this

explores systematically the two groups of the study

hypotheses and clarifies that in a deleterious economic

environment foreign ownership can attenuate the adverse

performance recession effects. By contrast, domestic

multinationality cannot mitigate the negative effects of

recession, contrary to the dominant view in the recent

performance literature.

The rest of the paper is set out as follows. The next

section provides the theoretical background and develops

the hypothesesof the study. The followingsection sets out

the research method of the study. This is followed by a

presentation of findings and discussion. Conclusions are

in the final section.

238 A. Georgopoulos and K.W. Glaister

©2017 European Academy of Management