Beauty in the Eyes of the Beholders: How Government- and Consumer-Based Country-of-Origin Advantages and Disadvantages Drive Host Country Investment Dynamics

Abstract

Building on the resource-based view, we propose conceptualizing a foreign multinational’s country of origin as a resource, an asset tied semi-permanently to the firm, and analyze how this resource affects its host country investments. We argue that the country of origin provides an advantage or disadvantage in the host country depending on its positive or negative view among the host-country government and consumers. This results in four alternative configurations of host country investment dynamics based on the alignment of their views. First, when a multinational’s country of origin generates a government-based advantage and a consumer-based disadvantage, the multinational is more likely to make larger initial investments to benefit from incentives and larger subsequent localization investments to disassociate itself from the country of origin. Second, when the country of origin creates a government-based disadvantage and a consumer-based advantage, the foreign firm is more likely to make smaller initial and subsequent investments to maintain its association with the country of origin. Third, when the country of origin leads to government-based and consumer-based advantages, the foreign multinational is more likely to make a large initial investment to benefit from government incentives and smaller subsequent investments to maintain its association with the country of origin. Finally, when the country of origin leads to government-based and consumer-based disadvantages, the foreign multinational is more likely to make smaller initial investments to minimize risk and larger subsequent investments to localize.

Introduction

We study how a foreign firm’s country of origin influences its investments in the host country. The impact of the country of origin has been discussed in two related but separate sets of literature: one in marketing that analyzes country-of-origin effects on the sale of products, and another in strategy that studies the liability and advantage of foreignness. On the one hand, in international marketing, the country of origin of a product has been discussed as an important source of disadvantage or advantage when selling foreign-made products. This has resulted in numerous studies under the term country-of-origin effect, with related concepts such as consumer nationalism or consumer ethnocentrism (Antonetti & Manika, 2022; Fischer et al., 2022; Herz & Diamantopoulos, 2017; Kong & Rao, 2021; Magnusson et al., 2019; Trinh et al., 2019). However, these studies pay little attention to how the country of origin affects firms themselves (Yu & Liu, 2018). On the other hand, the literature on the liability of foreignness focuses on the firm level and typically argues that subsidiaries of multinational firms face a competitive disadvantage as they incur additional costs that host-country firms do not (Caussat et al., 2019; Hymer, 1976; Zaheer, 1995; for a recent review, see Lu et al., 2022). A later literature discussed the advantage of foreignness that subsidiaries of foreign firms enjoy over domestic firms because of their privileged access to foreign technology (Nachum, 2010; Un, 2016). However, these studies tend to focus on foreign versus domestic firms rather than on how the country of origin drives behavior.

Hence, in this paper, we propose expanding these two research streams by bridging their insights in a novel manner. Specifically, building on the resource-based view (Barney, 1991), we propose conceptualizing a foreign multinational’s country of origin as a resource, an asset tied semi-permanently to the firm (Teece et al., 1997; Wernerfelt, 1984), and analyze how this resource affects its host country investments. Based on the notion that a resource not only creates an advantage but can also generate a disadvantage (Hitt et al., 2006), we propose that the country of origin provides an advantage or disadvantage in the host country depending on its positive or negative view among the host-country government and consumers. This results in four alternative configurations of host country investment dynamics based on the alignment of their views. First, when a multinational’s country of origin generates a government-based advantage and a consumer-based disadvantage, the multinational is more likely to make larger initial investments to benefit from incentives and larger subsequent localization investments to disassociate itself from the country of origin. Second, when the country of origin creates a government-based disadvantage and a consumer-based advantage, the foreign firm is more likely to make smaller initial and subsequent investments to maintain its association with the country of origin. Third, when the country of origin leads to government-based and consumer-based advantages, foreign multinationals are more likely to make a large initial investment to benefit from government incentives and smaller subsequent investments to maintain their association with the country of origin. Finally, when the country of origin leads to government-based and consumer-based disadvantages, foreign multinationals are more likely to make smaller initial investments to minimize risk and larger subsequent investments to localize.

These ideas and their explanations contribute to international business research and its study of foreign market expansion (Hymer, 1976; Lu et al., 2022; Un, 2011; Zaheer, 1995), and to the resource-based view and its analysis of resources and advantage (Barney, 1991; Patnaik et al., 2022; Teece et al., 1997; Wernerfelt, 1984). First, regarding foreign market expansion (Lu et al., 2022), the paper discusses the disadvantage and advantage associated with the country of origin, which is still limited in the literature on foreignness (Benischke et al., 2022). Most foreignness studies have focused primarily on subsidiaries of foreign multinational firms abroad, treating them as a monolithic group and comparing them to host-country firms to identify their liability and advantage of foreignness (Hymer, 1976; Un, 2016; Zaheer, 1995). We delve deeper into variations among foreign firms by their country of origin, and explain how the specific country of origin rather than their foreignness in general can provide an advantage for some and a disadvantage for others. We also add depth to previous discussions by introducing differences between the host-country government and consumers in their valuation of the country of origin. Their alignment or misalignments results in conflicting pressures that drive foreign firms’ investment dynamics, going beyond the usual focus of most studies on performance.

Second, the paper helps extend the resource-based view by explaining how the country of origin of firms, a resource common to several firms, can have a different impact on the firms’ competitive advantage and drive diverging behaviors. The usual explanation of a resource providing a competitive advantage is based on whether it creates value for customers and is rare (Barney, 1991). We extend this traditional view by explaining how the country of origin can provide an advantage even when it does not create value for customers or is not rare. First, we expand the analysis of value creation with the idea that the country of origin can have two alternative sources of value creation, for customers as traditionally discussed, and for the host country government. Moreover, we extend the usual view of value creation with the positive view of the country of origin, which can associate the product with desirable characteristics that may not be backed by tangible characteristics, and which may diverge between the government and citizens. Additionally, the analysis of the country of origin introduces the creation of disadvantages from the negative perception of the country of origin. This extends the usual discussion of competitive disadvantage as originating from a lack of resources toward the existence of resources that actually detract from the advantage created by other resources. Second, we propose that the rareness is not based on the uniqueness of one firm, as the country is associated with multiple companies, and is common to all. Thus, in some instances, a resource that is common to a set of firms can still provide them with an advantage as other firms do not have the association with the country of origin.

The Resource-Based View and the Country of Origin as a Resource

Resources and Advantage

The resource-based view sees firms as bundles of resources that are used to generate products or services which serve the needs of customers in competition with the offers of other firms (Penrose, 1959). Resources are tangible and intangible assets that are tied semi-permanently to a firm (Teece et al., 1997; Wernerfelt, 1984; for a recent review, see Patnaik et al., 2022).

Not all resources provide the firm with an advantage. The effect of resources on advantage depends on their characteristics. Resources can be a source of advantage when they are valuable (i.e., help create value for customers) and rare (i.e., few competitors have them or have them in the same quality) (Barney, 1991). One example is a restaurant in a neighborhood that has an award-winning chef who can create new dishes that attract customers better than chefs in nearby restaurants.

However, despite the common assumption that all resources support an advantage, not all of them do so (Hitt et al., 2006; Montgomery, 1995). Some resources can be neutral with regards to advantage (Montgomery, 1995), meaning that they neither provide an advantage nor provide a disadvantage, because competitors have similar resources. For example, the restaurants in a neighborhood are provided with loans by the local bank; these are useful for the restaurants to operate and serve meals, but are similar among them and thus not a source of advantage. Finally, some resources can even be a source of disadvantage (Leonard-Barton 1992), meaning that they subtract from the overall firm’s advantage. For example, in one of the restaurants an inexperienced bullying manager alienates front-of-the-house staff, detracting from the dining experience with a lack of coordination among servers, and thus reducing value creation.

Valuable and rare are the two conditions that determine whether a resource is a source of advantage. Additionally, if the resource is also difficult to imitate (i.e., competitors cannot use the same resource) and difficult to substitute (i.e., competitors cannot find alternative resources that provide similar services), the resource is considered to support a sustainable competitive advantage. Finally, if the resource is also appropriable (i.e., the firm controls the value created), then it supports a profitable, sustainable competitive advantage.

The resource-based view has commonly focused on the drivers of sustainability (difficult to imitate and substitute) rather than the basis of competitive advantage (valuable and rare). Most of the resource-based view literature has studied the sustainability of competitive advantage (D’Aveni et al. 2010), and how to reduce imitation and substitution of resources by competitors. To achieve this, firms can use causal ambiguity, whereby it is unclear how the firm achieves its outcomes (Lippman & Rumelt, 1982); complexity, whereby it is difficult to observe from the outside how the firm undertakes its activities (Rivkin, 2000); path dependencies and time compression diseconomies, whereby competitors need a long time to develop the same resources (Dierickx & Cool, 1989); or legal protection in the patent system, whereby firms can use lawsuits to prevent competitors from imitating their actions (Levin et al., 1987). The literature has paid less attention to the determinants of competitive advantage – value and rareness – assuming that resources have these characteristics by definition (Adner & Zemsky, 2006; Lepak et al., 2007). This is a widely-held misunderstanding that we aim to address.

Country of Origin as a Resource

We propose conceptualizing the country of origin as a resource and analyzing how it can provide an advantage or disadvantage depending on the views of the host-country consumers and government. The country of origin is a characteristic traditionally associated with the firm’s products and the firm, and thus fulfills the definition of a resource as an asset tied semi-permanently to the firm. International marketing studies have long made this association clear in studies on country of origin, which explain how the country of origin of a product, the “Made in Country X” label, affects its sales abroad (Antonetti et al., 2019; Kong & Rao, 2021; Magnusson et al., 2019; Trinh et al., 2019). When the firm exports and sells abroad, the country of origin of the product gains relevance as it becomes part of the attributes of the firms’ products; it is a visible and easily identifiable attribute because regulations require products to indicate their country of origin. In some cases, the specific country of origin creates problems (Benischke et al., 2022) because of the firm's association with the negative characteristics of the country (Antonetti & Manika, 2022; Feng, 2020; Sun et al., 2021). International business studies have tended to discuss the foreignness of the firm as a resource rather than the specific country of origin. Much of the literature argues that being a foreign firm creates a liability in the host country because foreign firms incur costs and suffer discrimination that domestic firms do not face (Hymer, 1976; Zaheer, 1995), which harms their success in the host country (Mata & Freitas, 2012; Zaheer, 1995; Zaheer & Mosakowski, 1997). For some, however, being foreign can create an advantage, which supports innovation (Un, 2016).

Integrating these two perspectives and building on the resource-based view, we argue that the country of origin is a resource that can provide an advantage or disadvantage depending on the views held by individuals, and on its relative level of rarity. First, the value of the country of origin depends on the valuation made by customers in markets outside the home country. This is typically the case of products, in which those coming from countries perceived as more advanced tend to be preferred, like shoes made in Italy or cars made in Germany, because customers perceive them to be of higher quality (Fischer & Zeurgner 2017; Kalicharan, 2014). The country of origin can sometimes provide a disadvantage when individuals have a negative perception of the attributes of foreign countries (Diamantopoulos et al., 2019), which are not only generated independently by the individuals but are also influenced by others with whom they interact (He & Wang, 2015; Swaminathan et al., 2007). For this reason, the US computer maker Apple notes that its products are “designed by Apple in California”, to highlight the origin of the most important part of the product, its technology and looks, to compensate for its actual country of manufacture, China, which it notes as “assembled in China” rather than “made in China” to lower its importance because of the perception of the underdevelopment of the country. Second, the rarity of the country of origin is relative, adding a nuance to competitive advantage. The country of origin is a resource that is shared across companies from the same home country. Except for a few notable firms with dual nationalities, like the British-Dutch oil firm Royal Dutch Shell, most companies are associated with one country of origin. This is usually the country in which the firm was created, even if it becomes a migrating multinational by incorporating elsewhere later (Barnard, 2014). Although the country of origin does not provide an advantage over firms from the same home country, it can support an advantage against firms from other countries competing in the same foreign market. As a result, the rarity provided by the country of origin is partial, helping a set of firms from the same home country achieve an advantage against firms from other home countries. In this way, treating the country of origin as a resource helps add nuance to the traditional resource-based view arguments.

Before we continue with the explanation, we need to establish some clarifications and theoretical boundaries of the analysis. First, the country of origin as a resource differs from location resources, i.e., the conditions of a location that support the operations of firms there, e.g., inexpensive and abundant capital, an educated labor force, or plentiful and productive arable land (Dunning, 1998). The country of origin is available to all firms from the same home country, differs from firms from other home countries, and is transferable. Location resources are tied to a place and firms need to move to that location to access them (Narula, 2012), and they are available to all firms that move there (Hennart, 2012). Second, we study how a firm’s country of origin affects its advantage and disadvantage in comparison to other foreign firms with a different country of origin. Thus, we do not discuss other sources of differences like firm-level advantages (Buckley & Casson, 1976; Dunning, 1977; see Tallman & Yip, 2001, for a review), liabilities (Cuervo-Cazurra & Un, 2007; Johanson & Vahlne, 2009; Nachum, 2010; Wang et al., 2009; Zaheer, 1995), mandates (Birkinshaw & Hood, 1998), or multinationals (Ghoshal & Bartlett, 1990; Wan et al., 2020). We also do not compare foreign firms to domestic companies (Siegel et al., 2019; Un, 2016; Zaheer, 1995). Third, we study the impact of the country of origin on investments in the host country. Hence, we do not analyze the impact on the marketing of products abroad (Antonetti et al., 2019; Herz & Diamantopoulos, 2017; Magnusson et al., 2019; Saran & Gupta, 2012; Trinh et al., 2019) or employees (Moeller et al., 2013; Newburry et al., 2014; Un, 2016). Fourth, we study firms that enter a country to sell products as we focus on the impact of the country of origin on consumers. Hence, we do not discuss firms entering a country to purchase natural resources or factors of production (Dunning, 1993). Fifth, we discuss the advantage and disadvantage as polar extremes. When the country of origin has a neutral impact on advantage (Montgomery, 1995; Villasalero, 2017), no predictions on the firm’s investment dynamics can be generated.

Government-Based and Consumer-Based Valuation of the Country of Origin

In addition to considering the country of origin as a resource, we add depth to the discussion by separating the valuations that the government and consumers make. We do so because these two groups diverge in their knowledge and influence on foreign firms and foreign investments. Table 1 summarizes the main differences in terms of the type, objective, and power in the interactions with the foreign multinational.

Table 1.

Differences between government and consumers in their interaction with foreign multinationals

	Government	Consumers
Type of interaction with the foreign multinational	Direct with the multinational and its managers, knowing the true country of origin of the foreign multinational	Indirect interaction through the purchase of products and services, reacting to the perceived country of origin of the foreign multinational
Objective in the interaction with the foreign multinational	Economic development of the country, assessment of benefits and costs of the foreign investment	Emotional consumption and personal status, assessment of feelings on purchase of products from the foreign multinational
Power in the interaction with the foreign multinational	Concentrated and coordinated, can block operations of the foreign multinational in the host country	Dispersed and uncoordinated, can reduce feasibility but not block operations of the foreign multinational

Regarding the type of interactions with foreign multinationals, the government interacts directly while consumers interact indirectly. The government has direct interactions with the foreign firm and its managers, evaluating the acceptability of the investment and in some cases blocking or supporting the entry of some foreign firms (Cuervo-Cazurra, 2018). Thus, the government knows the exact country of origin of the foreign investor and its ultimate owner because as the foreign firm registers and applies for permission to operate in the country, it discloses its country of origin. In contrast, consumers interact indirectly with the foreign multinational and its managers as they purchase products. Thus, consumers may not know the actual country of origin and will instead react to the perceived one, with foreign firms using local companies or brands (Han & Terpstra, 1988), using the label “distributed by” and a firm with a favorable country of origin, using host-country firms to appear local, or hiding the “made in” label (Giridharadas, 2013). These views are formed through their education and direct experience with foreign countries as well as via the stereotypes prevalent in the country and the opinions of others (Kramer et al., 2008).

In terms of the goal of the interaction with foreign firms, while the government tends to focus on economic development, consumers tend to focus on consumption. The host country government has an economic assessment of its relationship with the foreign investor, weighing the benefits and costs of the investment (Farole & Winkler, 2015; Master & McBride 2018; Ramamurti, 2001). In contrast, consumers have a much narrower objective of consumption, and they tend to assess foreign firms in terms of their values and standing among peers regarding their purchase and use of foreign products and services (Diamantopoulos et al., 2019; Swaminathan et al., 2007). They have a more emotional assessment of their relationship with the foreign firm (Chan, 2018; Fischer et al., 2022; Verlegh & Steenkamp, 1999).

Finally, in terms of power in the interaction with foreign multinationals, the government can block foreign investments, but consumers cannot. The government has concentrated power and can exclude firms from the country. It coordinates actions and decisions via direct negotiation among politicians and can offer a unified point of interaction with the firm (European Commission, 2020; Master & McBride, 2018), and can block the investments of foreign firms it considers to be a national security threat, such as the Chinese telecommunications firm Huawei in the US (Blatchford, 2022). In contrast, the power of consumers is dispersed among many, suffering from coordination problems in their opposition (Olson, 1971; Wixcey, 2014) and consumers cannot legally exclude foreign firms.

The Impact of Government- and Consumer-Based Country-of-Origin Advantages and Disadvantages on Foreign Firms' Investment Dynamics

These differences between the government and consumers in their valuation of the country influence the specific government-based and consumers-based country-of-origin advantages and disadvantages. The country-of-origin advantage emerges from a positive view of the country of origin of the foreign firm in comparison to the country of origin of other foreign firms, while the country-of-origin disadvantage arises from a comparatively negative view. We now explain how these affect investments, and later discuss how their differing combinations drive foreign investment dynamics.

Analyzing both the government- and consumer-based advantages and disadvantages yields surprising competing predictions. Whereas the government-based country-of-origin advantage induces foreign multinationals to invest more than what the conditions of the country would suggest in order to benefit from the incentives and subsidies provided by the government, the consumer-based country-of-origin advantage leads companies to reduce investments in order to maintain the association with the country of origin. Additionally, whereas the government-based country-of-origin disadvantage motivates firms to invest less in the country because they face additional costs and risks, the consumer-based country-of-origin disadvantage results in companies undertaking additional investments to localize operations. Thus, we have four types of investments strategies, which we call “subsidized”, “restricted”, “self-constrained”, and “compensating.”

Government-Based Country-of-Origin Advantage: “Subsidized” Investments

Host country governments that perceive foreign investors from a particular country of origin in a positive light favor them. They may perceive their association with a more developed country as bringing not only capital to the country, as all foreign investments do, but also superior technological and organizational capabilities and access to preferential export markets (Henisz & Zelner, 2010; Stopford & Strange, 1992). These superior technological capabilities can generate valuable spillovers to domestic firms via demonstration, training of local suppliers and distributors, and employee mobility (Blomstrom & Kokko, 1998; Kim et al., 2022; Rand, 2015; Shenkar et al., 2022). As a result, many governments have agencies devoted to attracting foreign investors (Wells & Wint, 1990) that provide fiscal and financial incentives to enhance the attractiveness of the host country to investors from preferred countries (Tavares-Lehmann, 2016).

At entry, the government-based country-of-origin advantage will likely motivate foreign multinationals to select the country for investment, and to make large local investments thanks to the subsidization of costs. Governments subsidize the cost of establishment with tax holidays and lower taxes, grants and preferential loans, market preferences, infrastructure, or monopoly rights (Blomstrom & Kokko, 2003; Brewer & Young, 1997; Un & Montoro-Sanchez, 2010). These incentives lower establishment costs, leading a firm from the preferred country to invest more, such as establishing a production operation instead of exporting from its home country (Chor, 2009; see a review in Greenaway & Kneller, 2007), or investing in excess capacity in the local operation and transforming it into an export platform from which it serves the host and other countries (Moran, 1998; see a review of export platforms in Ito, 2013). For example, the US government’s attempt at reshoring the production of semiconductor chips with the passage of the CHIPS Act to provide funding (Andrews, 2022), and the positive view of the country of origin of Samsung, South Korea, resulted in that company being invited to invest in building their facilities in the US with generous incentives.

After entry, the government-based advantage can continue to provide an incentive for the firm to undertake larger investments. The foreign firm’s ability to negotiate and obtain additional incentives and support from the government diminishes after the company invests and has assets committed in the country (Vernon, 1971, 1977), because the foreign firm is no longer choosing among alternative locations, and its ability to credibly threaten to move (Stopford and Wells 1992) diminishes. However, the government may provide additional subsidies to investors from preferred countries to motivate higher value-added investment in the country (Cantwell & Mudambi, 2000; OECD, 2003). Thus, the government may provide incentives in the form of additional training of employees or targeted tax deductions for high value-added activities such as research and development (R&D), testing, or design (Guimon, 2009; Un & Montoro-Sanchez, 2010). These subsidies and incentives can motivate managers of the firm to upgrade the mandate of the host country operation from serving the local market to acting as a center of excellence and serving other global operations of the multinational (Birkinshaw & Hood, 1998) or can motivate the foreign company to upgrade the subsidiary to become a regional headquarters and manage not only subsidiaries in countries in the region but also the intellectual property of the firm and the internal transfer pricing to benefit from lower taxes (Becker et al., 2008; Eden, 2009).

In sum, when facing a government-based country-of-origin advantage, the firm is likely to undertake subsidized investments in response to government incentives, undertaking large investments, especially in manufacturing and technology development. We summarize these ideas in this proposition:

Proposition 1. All else being equal, a foreign multinational facing a government-based country-of-origin advantage is more likely to make large initial and subsequent investments in the host country. Investments are more likely to be in activities that receive direct government incentives, such as production and technology development.

Government-Based Country-of-Origin Disadvantage: “Restricted” Investments

Although all foreign investments can, in principle, facilitate local development, some governments discriminate against firms from a particular country of origin, which results in a government-based disadvantage. Some governments dislike the country of origin of some firms because they perceive them as a threat to their sovereignty; foreign firms from particular countries may undermine the ability of the government to exercise full control over economic decisions because these firms have the flexibility to shift production across countries in which they are present (Kobrin, 2001; Stopford & Strange, 1992). Alternatively, government officials may dislike the country of origin for ideological reasons, such as in countries that want to reduce dependence on other countries (Bruton, 1998; Chou and Ou, 2022).

At entry, foreign firms that face a country-of-origin disadvantage may see the government establishing restrictions and controls on them and reduce their investments. These restrictions increase the costs of operating in the host country and alter the selection of locations (Froese, 2019). The government may use regulation to restrict firms from particular countries from investing in particular industries (Cuervo-Cazurra, 2018). In some cases, the disadvantage takes milder forms, such as requiring foreign firms to establish joint ventures to operate in the country (Cai & Elmer, 2019), restricting the employment of foreign nationals, and forcing technology transfer to local competitors (Golub, 2003). In response, foreign firms may use political strategies to counter such constraints (Encarnation, 1989; Henisz & Zelner, 2010) and share ownership with local entrepreneurs (Das & Teng, 2001; Kogut, 1988). All this tends to limit the size of investments undertaken by foreign firms, and induces them to invest in facilities with limited investment exposure to risks, like distribution or sales, with a lower cost of expropriation.

After entry, the country-of-origin disadvantage limits the incentive to undertake subsequent investments in the host country. The country-of-origin disadvantage can lead government officials to exclude foreign firms from particular countries from competing for government contracts (Branco, 1994; Evenett & Hoekman, 2004), in effect reducing foreign firms’ growth, particularly in industries dependent on government contracts such as infrastructure and utilities. The government may even impose new regulations or taxes on foreign firms that discourage expansion. For example, in 2014 the Russian government undertook additional inspections of the US restaurant chain McDonald’s and closed some of the outlets for lack of compliance with regulations; this was viewed as being driven by retaliation against sanctions rather than by the need to ensure that the restaurants were sanitary (Matlack, 2014). An alternative way to discriminate against foreign firms is by ensuring that they comply with the rules and regulations and not enforcing such regulations on local players. For example, in the late 1990 s, Coca-Cola in Brazil claimed that local soft drink makers evaded taxes, which was overlooked by the government and enabled them to charge lower prices than Coca-Cola could (Gertner et al., 2005).

When facing a government-based country-of-origin disadvantage, the firm is more likely to restrict its investments in the host country, reducing the level of investments and focusing on areas that are less exposed to potential expropriation, like sales and distribution. These ideas support the following proposition:

Proposition 2. All else being equal, a foreign multinational facing a government-based country-of-origin disadvantage is more likely to make small initial and subsequent investments in the host country. Investments are more likely to be in activities with reduced exposure to expropriation, like distribution and support facilities.

Consumer-Based Country-of-Origin Advantage: “Self-Constrained” Investments

Consumers may prefer foreign firms from particular countries because of the implied connotations that the country of origin carries, such as superior technology, better design, or higher quality (Balabanis & Diamantopoulos, 2016; Lee et al., 2016). Consumers' cognitive limitations bias their perceptions of the country of origin (Antonetti & Manika, 2022; Fischer et al., 2022), and there is a need for an alignment with the industries that are perceived as being particularly advantageous in the country (Roth & Romeo, 1992). For example, firms from Germany and Japan tend to enjoy a strong advantage when they are in mechanical and high-tech industries (Kramer et al., 2008).

At entry, the foreign company facing a consumer-based country-of-origin advantage is more likely to select the country for investment, but with limited investments and little or no local production, to maintain its country-of-origin preference of consumers. The consumer-based advantage leads to an increase in the demand for products from the country of origin beyond what the intrinsic characteristics of the product would grant (Elliot & Cameron, 1994; Magnusson et al., 2019). This translates into a preference for products coming from the country of origin, which provides an assured rather than a potential market, and a higher willingness to pay for them, which compensates for the initial costs. Producing in the host country would harm the perceived prestige of the country of origin of the product, as the company will not be able to claim the product is made in the desirable foreign country, and would reduce the perceived value in the minds of consumers as the products can no longer be considered foreign (Swoboda & Hirschmann, 2016; Johansson & Nebenzahl, 1986). Thus, although the company may invest in distribution operations to benefit from their preferences, it may also maintain the country of origin of the product by importing it and constraining investments in local production. For example, despite the benefits of localizing production, the Brazilian shoemaker Alpargatas has chosen to keep the production of its iconic Havaianas flip-flops in Brazil to maintain the association of its colorful flip-flops with the country of origin (Havainas, 2022).

After entry, foreign firms that enjoy a consumer-based advantage in a host country are less likely to undertake additional investments in the country, avoiding local production or adapting products to localize them to maintain the association with the preferred country of origin. If, after entry, the products are marketed successfully in the country and there are opportunities for expansion, they can invest in additional distribution and retail operations to reach dispersed consumers. However, the companies with the preferred country of origin will likely maintain production outside the country to be able to sustain the mystique and the brand prestige of the product (Johansson & Nebenzahl, 1986). The foreign company can invest in the adaptation of minimal features to ensure that the product complies with local regulations and requirements, but such investments may not reach the point at which products are designed with the needs of host country consumers in mind. For example, the Spanish retailer Zara did not have the large-size clothes preferred by American consumers, and instead had slim fits that only sold well in the largest cities (Economist, 2012); the company was criticized for not carrying sizes larger than eight (ABCNews, 2012).

In cases where the firm encounters a consumer-based country-of-origin advantage, it is likely to self-constrain its investments to ensure the connection with the favored country of origin, making small investments and focusing on sales and marketing while avoiding local production. These ideas support the following proposition:

Proposition 3. All else being equal, a foreign multinational facing a consumer-based country-of-origin advantage is more likely to make small initial and subsequent investments in the host country. Investments are more likely to be in activities that sustain the country-of-origin image, like distribution and marketing.

Consumer-Based Country-of-Origin Disadvantage: “Compensating” Investments

Some firms face a consumer-based country-of-origin disadvantage when consumers in a host country dislike the country of origin of the firm and its products. Consumers may dislike the country of origin for nationalistic reasons (Antonetti & Manika, 2022; Fischer et al., 2022) or because they perceive the country as being less developed than their own (Lee et al., 2016). The company may have to increase the quality of the product (Lee et al., 2016) or lower the price of the product significantly (Cui et al., 2012) to compensate for the negative perception of the country of origin. Thus, firms from disliked countries may have to lower the price to entice consumers to purchase the product and compensate for the negative perception. Extending this idea to investments results in the counterintuitive argument of foreign firms undertaking more investments when facing a consumer-based disadvantage.

At entry, foreign multinationals that face a consumer-based country-of-origin disadvantage are less likely to invest in that host country than in others, but once they decide to enter, they may undertake more investments to compensate for the negative perception through localization of production and brands. These investments can take the form of local manufacturing so that the company can claim that its products are made locally rather than coming from the disliked country of origin. Local production helps address nationalistic sentiments (Fischer & Zeurgner 2017), and the firm can advertise its contributions to the local economy as part of its branding. The firm can also acquire and market under local brands to avoid the association with the disliked country of origin. For example, the Chinese appliances maker Haier purchased the appliances division of the US firm General Electric (Flannery, 2016). This helped disguise the Chinese firm by using the consumer goodwill accumulated by the local brand.

After entry, the company that faces a country-of-origin disadvantage can further reduce its association with the disliked country of origin through additional investments. It can undertake additional investments to adapt its products to the local market to be more locally responsive (Johnson & Aruhthanes, 1995; Burton et al., 2020). The company can invest in market research and local R&D to redesign its products to match local preferences better, reorganize the production process to incorporate the changes, and create marketing campaigns that highlight products’ local content and adaptation.

Firms that face a consumer-based country-of-origin disadvantage are likely to engage in investments that compensate for the disliked country of origin, making large investments, and especially in areas that localize operations like local production. We summarize these ideas in this proposition:

Proposition 4. All else being equal, a foreign multinational facing a consumer-based country-of-origin disadvantage is more likely to make large initial and subsequent investments in the host country. Investments are more likely to be in activities that reduce the connection to the country of origin image through localization, like local production and brands.

The Impact of the Interaction of Government- and Consumer-Based Country-of-Origin Advantages and Disadvantages on Foreign Firms' Investment Dynamics

The interaction of the government- and consumer-based country-of-origin advantages and disadvantages also generate surprising predictions on investment dynamics. Despite what one would expect from misalignment in the valuation of the country of origin, when there is a misalignment of government-based and consumer-based advantage or disadvantage, initial and subsequent investments take similar directions, either being larger or smaller. In contrast, when there is an alignment of the government-based and consumer-based advantage or disadvantage, initial and subsequent investments diverge. This is another crucial novelty of the paper that is missing in prior studies that have separately analyzed the government- and consumer-based influences. Table 2 summarizes how the interactions result in four investment strategies, which we call “all in”, “under the radar”, “big splash”, and “late bloomer”.

Table 2.

Interactions between the country-of-origin government and consumer advantage and disadvantage and foreign firms' investment dynamics

		Government-based
		Country-of-origin advantage	Country-of-origin disadvantage
Consumer-based	Country-of-origin advantage	“Big splash” Large initial investments and small subsequent investments	“Under the radar” Small initial investments and small subsequent investments
	Country-of-origin disadvantage	“All in” Large initial investments and large subsequent investments	“Late bloomer” Small initial investments and large subsequent investments

Government-Based Country-of-Origin Advantage and Consumer-Based Country-of-Origin Disadvantage: “All in” Investments

A foreign firm that faces a government-based advantage but a consumer-based disadvantage would likely undertake large initial and subsequent investments. A foreign firm facing a government-based advantage is likely to have large investments because the government is interested in attracting foreign firms from the preferred country of origin to the country and willing to provide economic incentives in the form of subsidies (Buckley et al., 2013; Huang, 2005; OECD, 2003). These not only reduce the costs of establishment but also motivate firms with a preferred country of origin to operate at a large scale (Cantwell & Mudambi, 2000). The government can provide tax breaks and ease regulations to attract foreign firms to make a substantial initial investment, such as setting up a production facility. Once the company has entered, the government can encourage the firm from the desired country of origin to invest more in higher value-added activities, such as in R&D to develop new technologies in the country. The government can provide additional tax incentives and benefits for hiring and developing local scientists who transfer their knowledge to other domestic firms in the country, helping to improve the innovativeness of the country (Guimon, 2009; Un & Montoro-Sanchez, 2010; Song et al., 2003).

Surprisingly, the consumer-based country-of-origin disadvantage reinforces the outcome of the government-based advantage and leads to larger initial and subsequent investments. The consumer-based disadvantage motivates the firm from the discriminated country of origin to reduce its association with the country of origin. The firm can achieve this by increasing local R&D and production investments in the host country in the design and production of the products to localize and adapt products to local preferences (Johnson & Aruhthanes, 1995) and disassociate itself from the country of origin. The firm from the disadvantageous country may invest in hiring primarily local employees, from engineers to sales representatives, to reduce the association with the country of origin.

The outcome of this interaction is the “all in” investment strategy in which the firm has larger initial and subsequent investments, and investments that benefit from government support but reduce the connection to the country of origin. We summarize these arguments in the following proposition:

Proposition 5. All else being equal, a foreign multinational facing a government-based country-of-origin advantage and a consumer-based country-of-origin disadvantage is more likely to make large initial and subsequent investments in the host country. Investments are more likely to be in activities that benefit from government support and facilitate localization, like local production and brands.

Government-Based Country-of-Origin Disadvantage and Consumer-Based Country-of-Origin Advantage: “Under the Radar” Investments

When the firm faces a government-based country-of-origin disadvantage and a consumer-based advantage, these are likely to reinforce the firm to undertake small initial and subsequent investments. Smaller initial investments enable the company to address the additional costs and risks that the government imposes, reducing the potential exposure to changes in policy and the risk of nationalization that a government-based disadvantage can bring. Firms that face a government-based disadvantage may see the government establishing restrictions and barriers to investments because of the dislike of the country of origin. These barriers increase uncertainty and the costs of operating in the country. The firm limits investments to reduce exposure and losses. As such, firms from a disliked country of origin are less likely to make large investments, especially at entry. However, the consumer-based advantage motivates the firm to enter the country to sell the preferred products from the country of origin, but reinforces the government-based incentive to maintain small investments at the entry to maintain the association with the country of origin of the firm. To do so, the company will establish sales and distribution in the host economy but not invest in local production and adaptation.

After entry, the government-based disadvantage can continue to discourage the firm from making a large investment in value-added activities. As a foreign firm operates in the country, it gains knowledge of how to operate there (Johanson and Vahne, 1977). If the government gives preference to domestic competitors (Trionfetti, 2000) and foreign firms whose countries of origin are viewed more positively, a foreign firm whose country of origin is viewed negatively is less likely to increase its investments. The relatively small initial investment in sales and marketing enables foreign firms to maintain their footloose nature and cross-country flexibility (Mata & Freitas, 2012). Furthermore, the consumer-based advantage also encourages the firm to make small investments in the host country, not only initially, but also subsequently to maintain the firm’s association with its country of origin. Thus, instead of investing in localization activities, like local R&D or manufacturing of products, foreign firms are more likely to continue to import their products from the home country to maintain its association with the country of origin. If they must adapt some features of the products to comply with local rules and regulations, foreign firms may do so as required, but only to the point at which they still maintain their exclusive country of origin association that appeals to consumers (Johansson & Nebenzahl, 1986).

In sum, based on the above discussion, we refer to this investment strategy as “under the radar,” and we summarize it in the following proposition:

Proposition 6. All else being equal, a foreign multinational facing a government-based country-of-origin disadvantage and a consumer-based country-of-origin advantage is more likely to make small initial and subsequent investments in the host country. Investments are more likely to be in activities that reduce exposure and have reduced localization, like marketing and distribution.

Government-Based and Consumer-Based Country-of-Origin Advantages: “Big Splash” Investments

At entry, a firm facing both government-based and consumer-based advantages may undertake a large initial investment to benefit from the incentives and subsidies provided by the government that accompany the government-based advantage, but a limited localization and adaptation of the products to the conditions of the local market to maintain the connection to the country of origin. The foreign firm may invest heavily in sales and marketing activities and establishing distribution channels that increase employment and thus meet government requirements to receive subsidies. It may also invest in building good relationships with government officials to continue to receive the benefits. It is likely to hire more local employees, to benefit from their knowledge of consumer tastes, sales, and marketing norms in the country (Un, 2016). The foreign firm can also undertake high value-added investments in R&D to benefit from subsidies and tax advantages provided by the government for technology investments. However, the consumer-based advantage undermines the incentives to establish large localization investments in manufacturing in the host country. Consumers have a preference for products made in the country of origin of the firm as they perceive them to be of superior quality. This undermines the incentive of foreign firms to undertake local production that would reduce the connection to the country of origin.

After the initial investments, subsequent investment activities are likely to be relatively limited to maintain the country-of-origin association of the products because of the consumer-based country-of-origin advantage. Government incentives usually taper off after initial entry as the foreign firm is already invested and operating in the country. Additionally, avoiding investments in manufacturing to maintain the consumer-based advantage and the associated consumer preference for foreign products undermines local production, constraining one type of investment that tends to receive government support. The initial large investments in sales and distribution are likely to see the foreign firm operate well in the host country with a limited need to undertake additional investments in marketing and distribution. If needed, the foreign firm may alter some features of the products to serve customers better, but do these alterations in design and production activities in the home country to continue to maintain the authenticity of the original products made in the country of origin.

We summarize these ideas under the banner “big splash” investment strategy, whereby the foreign firm makes a large initial investment in the host-country to benefit from the government incentives but makes small subsequent investments to sustain the connection to the favored country of origin. Formally, we propose that:

Proposition 7. All else being equal, a foreign multinational facing government-based and consumer-based country-of-origin advantages is more likely to make large initial and small subsequent investments in the host country. Investments are more likely to be in activities that benefit from government support but that have reduced localization, like local technology development and marketing and distribution.

Government-Based and Consumer-Based Country-of-Origin Disadvantages: “Late Bloomer” Investments

When the company faces government-based and consumer-based country-of-origin disadvantages, its investment strategy varies over time, starting with a small initial investment to deal with the dislike by the government, and a large investment later, after it gains experience dealing with the host country government, to reduce the impact of consumer dislike for the country of origin.

At entry, a government-based disadvantage is more likely to lead the foreign firm to make a modest initial investment to test out the market and reduce exposure. Some governments dislike or even discriminate against foreign firms for many reasons that include increased competition for their domestic firms, a threat to their national sovereignty, and fear that the presence of foreign firms can affect their culture (Kobrin, 2001; Stopford & Strange, 1992). Therefore, at entry, foreign firms that face a government-based disadvantage may see the government lengthen the amount of time to get approval to get started in the country or put restrictions on their behaviors, such as whether they can transfer their resources across various country subsidiaries and headquarters. These constraints on foreign firms are likely to discourage them from making a large initial investment because of the political risks. The government may limit foreign firms from entering certain industries or force them to form a joint venture with a local firm. However, the consumer-based disadvantage may nevertheless motivate the firm to invest in the country and serve local consumers in collaboration with local firms that can provide foreign firms with knowledge on the preferences of local consumers.

After entry, the disadvantages of government- and consumer-based disadvantages are likely to result in increased investments as the firm learns how to operate and needs to adapt products to the local conditions. The discrimination by the government increases risks for the foreign firm, thereby limiting the expansion of their operations in the host country (Henisz & Zelner, 2010). The government may limit the firms by imposing regulations or taxes on foreign firms but not on domestic companies. Such conditions discourage foreign firms from further expansion of their operations in the country (Matlack, 2014). However, after entering, the firm gains experience in how to manage relationships with the government and reduce the risk of discrimination. It can also show the benefits that the host country is obtaining from the local investments (Stopford & Strange, 1992) and the cost that discriminating against it will create. At the same time, the consumer-based disadvantage induces foreign firms to invest in adapting to the host country and reducing the perceived connection to the disliked country of origin in the mind of consumers. Thus, it can deepen its roots in the host country and invest in the local adaptation of products to suit local needs, or ally with or purchase local firms to benefit from the established operations and brands and reduce the perceived link to the country of origin of its products, eventually replacing imports with locally made products and thus reducing the consumer-based disadvantage. Such localization and disassociation from the country of origin of the foreign firms enable them to reduce their consumer-based country-of-origin disadvantage.

Based on the above analysis, we call this investment strategy “late bloomer.” The government-based disadvantage is likely to discourage a large investment in the initial entry, while the consumer-based disadvantage encourages the firm to invest more in the host country, especially after entry as it learns how to operate in the host country. Specifically, we propose that:

Proposition 8. All else being equal, a foreign multinational facing government-based and consumer-based country-of-origin disadvantages is more likely to make small initial and large subsequent investments in the host country. Investments are more likely to be in activities that reduce exposure but facilitate localization later, like marketing and distribution and later limited localization of production.

Conclusions

We build on the resource-based view to analyze how the country of origin of foreign firm affects their investments in a host country. We explain how the country of origin of the firm, which is a resource common across firms from the same home country, can nevertheless affect their behavior abroad. We propose that the valuation by the government and consumers results in a country-of-origin advantage or disadvantage that influences investment dynamics. Moreover, we explain how the alignment of the government-based and consumer-based country-of-origin advantages and disadvantages results in surprising investment dynamics and the type of investments undertaken.

Contributions

The ideas contained in the paper make several important contributions to the resource-based view of the firm, to the topic of foreign investment, and to practice.

Country of Origin as a Resource

We contribute to the resource-based view (McGahan, 2021; Patnaik et al., 2022; Teece et al., 1997; Wernerfelt, 1984) by conceptualizing the country of origin as a resource and explaining how it has a varying impact on advantage. Whereas the country of origin is a neutral resource when a firm operates in the home country because other domestic firms share it, it becomes a resource that can be a source of competitive advantage or disadvantage abroad depending on how consumers and government officials in foreign markets perceive it. This characteristic of the advantage is not based on the ability of competitors to overcome barriers that limit the imitation or substitution of the resource, which has been the focus of most studies (Dierickx & Cool, 1989; Lippman & Rumelt, 1982; Peteraf & Bergen, 2003; Rivkin, 2000). Instead, it is based on how individuals (e.g., consumers and government officials) give value to the resource. Value is an area of the Valuable-Rare-Difficult to imitate-Difficult to substitute (VRIS) framework that has received less attention (Adner & Zemsky, 2006; Lepak et al., 2007; Miller, 2018), and this paper highlights its importance. Rather than being an intrinsic characteristic of a resource, value is determined by the perceptions of individuals outside the firm – in our case the host-country government and consumers – which, in many cases, are beyond the control of the firms. This discussion is important because value tends to be assumed in many of the analyses of the competitive advantage of firms. Future studies can pay more attention to the perception of governments and consumers and analyze which particular resources and capabilities are connected to value creation and how these alter the advantage created, or in some cases lead to the generation of disadvantage. Specifically, we explain how the same resource, in this case, the country of origin of firms, can be viewed as valuable and rare depending on who in the host country views the firm’s country of origin. The country of origin can be viewed positively or negatively by either the government, which has power over the foreign firms in terms of whether they can invest in the country, or the consumers, who have power over foreign firms via the choice to purchase their products. When these host-country actors view the foreign firms’ country of origin positively, their country of origin becomes a positive valuable resource that enables the foreign firms to use it as a source of competitive advantage over other competitors who are viewed less positively. This valuable resource enables firms to invest more or less in the country to further develop their other sources of competitive advantages (e.g., firm-specific ones). In contrast, when these actors view the country of origin of the foreign firms negatively, it becomes a competitive disadvantage resource that is not valuable for the foreign firm. In this case, the firm may choose not to enter the country or may choose to do so with limited investments, and when they choose to remain in the country they may choose to make a larger investment to become localized, disassociating themselves from their country of origin. We also provide additional theoretical development about how the foreign firms invest when there is a misalignment between the views of these host-country actors. Second, the positive views of the foreign firms’ country of origin also makes it a rare resource that provides firms with a competitive advantage.

Government-Based and Consumer-Based Country-of-Origin Advantages and Disadvantages and Investments Dynamics

We extend the international business literature in several ways. We argue that there are variations in the advantage and disadvantage created by the country of origin on firm’s investments. Most studies focus on their liability of being foreign, with fewer studies that focus on their advantage of being foreign at the multinational firm and subsidiary levels (Caussat, 2019; Hymer, 1976; Lu et al., 2022; Zaheer, 1995). By taking into account the different actors in the host country, in this case, the government and consumers, we argue that the liability and advantage depend on how these actors view the same country of origin of foreign firms relative to other foreign firms, rather than whether they are foreign or non-foreign. Thus, instead of analyzing the differences in the foreign firms’ lack of knowledge of the host-country market that puts them at a disadvantage and differences in institutions (e.g., regulations) as sources of their liability (Mezias, 2002; Wu & Salomon, 2017), we focus on host-country individuals’ (e.g., government officials and consumers) perceptions of the country of origin.

Moreover, by analyzing the perceptions of different actors, we explain how their perceptions and alignment exert different pressures on how foreign firms invest in the country to manage their operations. These perceptions lead to counterintuitive predictions of how firms invest in the country to manage their sources of competitive advantage and disadvantage. Viewing the country of origin as a resource that is neutral in the home country and that is then turned into a positive or negative in foreign markets, the paper highlights how the country of origin can provide an advantage and disadvantage at the same time, as consumers and government officials may have similar or dissimilar perceptions of the value of the foreign country of origin. This results in them reacting differently to the country of origin of the foreign firms in their purchasing of the firms’ products and whether the host-country government will embrace certain foreign firms and shun others. Moreover, different from other studies that discuss entry strategies and the foreign firms’ initial investments in the country, we argue that host-country actors’ perceptions may result in competing influences on the dynamics in the firm’s investments in the host country, not only initially but also subsequently. These dynamics cannot be identified when conducting separate analyses of the government’s and consumers’ valuations or when only discussing their entry strategies and the initial investment in the country as has been done previously (Antonetti & Manika, 2022; Cuervo-Cazurra, 2018; Kong & Rao, 2021). Future studies can build on these ideas and analyze how the resources and capabilities of a multinational create differential value depending on the individuals that are assessing such value creation, extending the discussions to other groups such as employees, distributors, and suppliers.

Contributions to Managerial Practice

Finally, the paper has important implications for practice. With the rise of nationalism, disruption caused by the COVID-19 pandemic, political conflicts, and potential future conflicts between countries (Kitamura, 2019; Zettelmeyer, 2019), firms rethink where, how, and how much to invest in foreign markets. With the rise of nationalism, more governments are becoming increasingly protective of their domestic markets while consumers are becoming more conscious about the country of origin of the products they purchase (for a recent review, see Fajgelbaum et al., 2019). This results in increases in government-based and consumer-based advantages for some foreign firms and disadvantages for other foreign firms as more governments are calling for doing business with countries whom they view positively (Hayashi, 2022). However, governments also need to attract inward foreign direct investments (Ferrett & Gravino, 2021; Tavares-Lehmann, 2016) to further develop their economies. With the increased discussion on rethinking globalization and the persistent need to invest and trade with other countries, more governments are scrutinizing the country of origin of firms interested in entering their markets. Firms whose country of origin is viewed positively are allowed and encouraged to enter while those whose country of origin is seen negatively, such as a threat to national security, are shunned (Cuervo-Cazurra, 2018; U.S. Department of the Treasury, 2022). As a result, more countries are become more interested in what should be on-shored; if it cannot be on-shored, an alternative is “friend-shoring”, whereby firms’ sourcing and investments are from and in countries that they perceive positively (Hayashi, 2022).

Limitations and Future Research

The boundary conditions that we established to make the analysis manageable can be relaxed in future research. First, the proposed arguments are ceteris paribus firm-specific advantages. Future studies can analyze how other sources of firm-specific advantages interact with the country of origin and reinforce or undermine their joint effects in supporting the overall competitiveness of the foreign firm in the host country. Second, we did not discuss how the advantage and disadvantage may vary by the industry of operation, and future studies can analyze how the alignment between the country of origin and the industry of the firm supports or detracts from the advantage and disadvantage. Third, we focused on the impact of the government’s and consumers’ views of the country of origin on investments in the same host country. Future studies can analyze the influence of the views of other stakeholders (e.g., employees, suppliers, investors…) on other firm behavior beyond investments (e.g., technology development, finance, logistics…) to further understand intra-firm variation in the country-of-origin disadvantages and advantages. Fourth, we focused on firms that enter a country to sell and maybe produce and sell to the consumers in that particular country and thus their perception of the firm and its products is important. Future studies can analyze how other entry motives, such as access to natural resources or better inputs, modify the impact of the view of the country of origin on investments. Fifth, for simplification, we focused on the country of origin of the firm. Future studies can analyze firms that have multiple countries of origin, or that create products from a diversity of countries, and how the mix of countries alters the assessment by individuals in the host country. Finally, we focused on in-depth theoretical development of how the views of the host-country government and consumers of the foreign firm’s country of origin affect its decisions to invest in the host country. Future studies can test these propositions.

Final Thoughts

All in all, the paper provides a more nuanced understanding of how foreign firms’ country of origin affects their investment dynamics in foreign markets. By considering the variation in host-country actors’ views of foreign firms’ countries of origin, we introduced the ideas of the government-based and consumer-based advantages and disadvantages and how these can be aligned and misaligned, resulting in foreign firms investing in the foreign market differently to compete. All these ideas open several avenues that future research can build on and extend to provide a better understanding of the competitiveness of subsidiaries of multinational firms.