How Firms Can Make the Most of Global Ties

global_tiesLocation, location, location! A growing body of research is shedding light on how the familiar real estate mantra is relevant for a firm’s innovation outcomes. When a company decides to set up operations abroad, the established networks between the two countries — both at the personal and the institutional level — are fundamental for predicting the foreign operation’s success.

According to Mack-funded researcher Exequiel Hernandez, immigrant populations provide a significant advantage to firms from their own nation that set up foreign operations in a new country. Hernandez confesses he was surprised by how robust the results were, outweighing even other factors like tax incentives or the presence of similar firms. The diaspora effect is particularly pronounced for knowledge-based activities such as connecting a company to providers of services in the new nation or determining where best to locate the subsidiary.

Immigrants are not the only transnational links that can smooth expansion abroad for a company. Research by Anupama Phene and Srividya Jandhyala presented at this year’s Wharton Technology and Innovation Conference cites connections through intergovernmental organizations (IGOs) as a predictive factor for success in foreign operations.

According to their research, a firm that wants to open a foreign subsidiary will increase its odds of innovation success by choosing a location connected to its home country through IGO-based institutional ties. This positive correlation applies mainly to R&D operations, because the international links built within knowledge-based IGOs reduce friction in information flow. Although the researchers measure the number of international IGO connections, the actors that truly matter are the individuals that build personal networks within these IGOs. The ties of the people, not the institutions themselves, account for the knowledge facilitation that benefits foreign subsidiaries.

For managers deciding where to expand abroad, the obvious lesson is to consider locations with the existing international connections that predict success. For countries seeking to attract expansion, the advantages of these connections also provide important implications. The public discourse about immigration policy in the U.S., for instance, often centers on the jobs immigrants will perform or the resources they will consume. Reframing the issue, and considering the role immigrant communities play in attracting foreign investment, highlights overlooked benefits that may exist in implementing immigrant-friendly policies.

As the roles of individuals and international institutions become increasingly clear, a new question emerges: We know that a firm will make choices based on the differences between nations — by operating in a country that has better tax breaks, for example — but what role do domestic institutions play in the choices of a foreign firm?  In forthcoming research, Hernandez is exploring how forging international alliances, as opposed to opening subsidiaries, may figure into organizational strategy. “The question is whether firms use alliances to exploit differences… In some cases owning an operation may be too expensive or not be the best way to organize, and an alliance makes more sense.” Part of what motivates the research is a hypothesis that firms are motivated to partner with U.S. firms to protect the value of their intellectual property. Says Hernandez, “Foreign firms may often ally with a U.S. firm to be able to more easily patent with the U.S. Patent and Trademark Office, [because] intellectual property protection in the U.S. is stronger than in many other countries.”