Market Size, Legal Institutions, and International Diversification Strategies: Implications for the Performance of Multinational Firms

Recognizing that country-specific resources are generally difficult to imitate or diffuse across national boundaries, we propose that home country conditions are key determinants of firms’ strategic choices. By embracing insights from both institutional economics and resource-based view, we identify two country-level environmental constituents – domestic market size and legal institutions – to examine how these resources influence multinational firms’ international diversification strategies. We further propose that home country legal institutions moderate the link between geographic diversification and firm performance.These hypotheses are tested with historical data on 435 multinational firms based in 13 developed economies. Results suggest that a multinational firm’s degree of international diversification has a U-shaped relationship with the size of the firm’s domestic market; firms from civil law countries are more likely to pursue international diversification than their counterparts from common law countries; and the effect of international diversification on firm performance was more pronounced among MNCs from civil law countries.