The Relative Importance of Country, Industry and Firm Effects on Firm Performance

The globalization process has created considerable speculation on the impact of the home country environment to a firm's competitive advantage in international markets. Using a random effects model that is partly induced from the concept of comparative advantage and competitive advantage and partly following the descriptive modeling of performance determinants, this paper explores the quantitative impact of home country environment on the performance for firms across 6 countries. The paper uses two value-based measures of firm performance, i.e. risk adjusted and cash-flow based. The results indicate that the importance of country and industry factors is low and firm-specific factors dominate performance both across and within countries. The results also show that global industry effects are becoming increasingly more important than country effects, while comparative advantage factors, while small, are significant in explaining performance across countries within the same industry.