home country networks and foreign .u.s. venture capital firms between 1991 and 2002. we calculated
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HOME COUNTRY NETWORKS AND FOREIGN EXPANSION:EVIDENCE FROM THE VENTURE CAPITAL INDUSTRY
ISIN GULERUniversity of North Carolina
MAURO F. GUILLENUniversity of Pennsylvania
We propose that home country network advantages shape firms foreign expansion.We argue that a social status advantage is transferable from one market to another asa signal of quality but that a brokerage advantage is more context-specific and difficultto transfer. Furthermore, the value of network advantages changes as networks evolve.Data on the foreign market entries of 1,010 U.S. venture capital firms provide robustsupport for the effects of social status. We also find that brokerage reduces foreignentry in the absence of home country partners in a new market and increases it whenpartners are already operating in that market.
Foreign market entry is a process fraught withdifficulty for firms, given the unknowns of operat-ing in settings that can be very different from theirhome countries. The literature on internationalmanagement suggests that home country advan-tages allow firms to compensate for the difficultiesassociated with operating abroad. This stream ofresearch has tended to emphasize the advantagesassociated with the possession of brands, technol-ogy, know-how, and general management skills(see Caves  and Helfat and Lieberman for reviews of this literature). Little attention, how-ever, has been paid to the effect on foreign expan-sion of network-based advantages in a firms homecountry, in spite of the large body of evidence doc-umenting the influence of social networks on firmstrategy and performance (e.g., Burt, 1992; Na-hapiet & Ghoshal, 1998; Podolny, 2005). There issome international evidence indicating that bothvertical relationships with suppliers or buyers andties within business groups in a home country areassociated with entry into specific foreign markets.This line of research shows that firms follow theirpeers, customers, or partners into foreign markets;
it does not, however, examine the impact of firm-specific advantages arising from firms network po-sitions in the home countries (e.g. Guillen, 2002;Martin, Mitchell, & Swaminathan, 1995; Martin,Swaminathan, & Mitchell, 1998).
Our theoretical point of departure is the theory offoreign expansion and its emphasis on firm-leveladvantages developed in a home country (Hymer,1976; Kindleberger, 1969). We seek to show that thesocial network approach can offer a comprehensiveand insightful analysis of the impact of a firmshome country on its pattern of internationalization.The network literature has identified two main ad-vantages associated with a firms position in a so-cial structure. First, networks confer social status(Podolny, 1993, 2001). One common way of think-ing about social status is in terms of centrality,which refers to the extent to which a node in anetwork is linked to other nodes, especially thosealso characterized by high social status. Social sta-tus serves as a signal of the quality and trustwor-thiness of a focal firm, thus reducing so-called al-tercentric uncertaintythat is, the uncertainty thatpotential customers, suppliers, or partners mightfeel about the firm (Jensen, 2003; Podolny, 2001).Second, the focal firm may be a broker or interme-diary between clusters of firms otherwise discon-nected from each other (Burt, 1992; Podolny, 2005).A broker occupies a distinctly advantageous posi-tion, as other firms depend on it to obtain crucialinformation, conclude deals, or get things done(Burt, 1992, 2005).
We argue that the advantages arising from afirms network position in its home country canaffect both its propensity to pursue foreign oppor-
We thank Editor Duane Ireland and three anonymousreviewers for their valuable comments. Funding from theMack Center for Technological Innovation at the Whar-ton School is gratefully acknowledged. We also thankBoston University School of Management for support inacquiring the data. Seminar participants at Boston Uni-versity, Kellogg, London Business School, MIT, Rutgers,and Wharton; participants at various conferences; andVit Henisz provided excellent comments and sugges-tions. We thank Simone Polillo for his help with thecalculation of the network variables.
Academy of Management Journal2010, Vol. 53, No. 2, 390410.
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tunities and its choice of foreign markets to enter,two of the most fundamental research issues in theinternational management field. We propose to an-alyze the home country social structure withinwhich a firm is embedded as a determinant, amongothers, of foreign expansion and market choice. Wealso examine how the impact of network-relatedadvantages on foreign market entry changes as net-works evolve over time.
Our core argument is that network-related advan-tages differ in their transferability to foreign loca-tions. Only advantages of universal applicability orappeal can be exploited in a large number of mar-kets, industries, or locations (Buckley & Casson,1976; Caves, 1996; Helfat & Lieberman, 2002; Hen-nart, 1982). Some advantages may be more loca-tion-specific (e.g., marketing skills), whereas others(e.g., technology or organizational capabilities) aretransferable to many locations (Chatterjee &Wernerfelt, 1991; Helfat & Lieberman, 2002; Teece,1980, 1982). We argue a social status advantagearising from network position is valuable in multi-ple contexts and so widely transferable as a signalof the overall quality or competence of a firm(Podolny, 2005). By contrast, brokerage advantageis context-specific in that it is local and contingentin nature (Burt, 1997; Gabbay & Zuckerman, 1998;Xiao & Tsui, 2007).
To examine the transferability of network-relatedadvantages to new settings, we follow Bourdieuand Wacquants definition of network advantages(which are also called social capital): The sumof the resources, actual or virtual, that accrue to anindividual or group by virtue of possessing a dura-ble network of more or less institutionalized rela-tionships of mutual acquaintance and recognition(1992: 119). The idea that advantages originatingfrom a networks structure may be portable beyondthe original structure is not new. Coleman providedseveral examples in which an organization thatwas initiated for one purpose is available for appro-priation for other purposes, constituting importantsocial capital for the individual members (1988:S108). In a similar vein, Uzzi and Gillespie ex-plored how actor A acquires resources or compe-tencies from actor B that are of value in its inde-pendent transactions with actor C (2002: 23;emphasis in the original). More recently, Jensen(2003, 2008) examined the transferability of net-work-based advantages from one product market toanother. We extend and complement the literatureon the transferability of network-based advantagesby examining the impact of these advantages onfirms propensity to expand abroad and on theirchoice of foreign markets to enter. Most impor-tantly, we examine how focal firms with various
levels of social status and brokerage advantagesreact to the entry of home country partners intoforeign markets, thus providing a dynamic perspec-tive that takes into account how networks and theadvantages associated with them change over time.
Our theoretical development is grounded in em-pirical evidence from the venture capital industry.We tested our arguments using systematic empiri-cal data on the foreign market entry decisions ofU.S. venture capital firms between 1991 and 2002.We calculated the social status and brokerage ad-vantages of firms on the basis of their structuralpositions in the domestic syndication networkwhich accounts for more than 95 percent of allinvestments by U.S. firmsand examined the ef-fects of these advantages on entry into foreign mar-kets. In the final section of the article, we discussour findings and their generalizability to otherindustries.
By integrating theories of international businesswith those from the field of social network analysis,we strive to contribute to both research traditions.We extend prior work on foreign market entry byemphasizing firm-specific advantages that origi-nate from network structure as opposed to advan-tages that firms develop within their boundaries.This study also contributes to the research on in-terfirm networks by examining the portability ofadvantages originating from a given network out-side the boundaries of the network. We argue andempirically demonstrate that network-based ad-vantages differ in transferability, leading to vary-ing rates of foreign market entry. We also com-plement prior research by highlighting how theimpact of network advantages on foreign marketentry changes as a network evolves.
For the purposes of this study, we focus ourattention on venture capital firms located in theUnited States and their investments abroad. Ven-ture capitalists raise money from investors of vari-ous types, placing it into a fund that they use toacquire equity stakes in entrepreneurial ventures.At the end of a predetermined periodtypicallyseven to ten yearsthe investments are liquidatedand the proceeds are returned to the investors, lessa management fee of about 20 percent.
In addition to funding, venture capitalists pro-vide entrepreneurs and their ventures with strate-gic advice, contacts, and reputation (Gompers &Lerner, 2000, 2001). The venture capital industry isan intensely social business (Freeman, 2005:163), as venture capital firms often syndicate theirinvestments with others. They do so in order to
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