Exploiting the liability of foreignness: Why do service firms exploit foreign affiliate networks at home?

Journal of International Management 17 (2011) 15–29

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Journal of International Management

Exploiting the liability of foreignness: Why do service firms exploit foreign affiliate networks at home? Dirk Michael Boehe ⁎ Insper Institute of Education and Research, Rua Quatá, 300/Sala 423, CEP: 04546-042, São Paulo, SP, Brazil

a r t i c l e

i n f o

Article history: Received 26 July 2010 Received in revised form 22 September 2010 Accepted 23 September 2010 Available online 30 October 2010 Keywords: Internationalization of service firms Multinational banking Emerging markets Liability of foreignness Barriers to expansion

a b s t r a c t Drawing on both a resource-based view of the firm and an in-depth case study, we develop a novel conceptual model that explains under what conditions a service firm may use its international affiliate network to build a differentiation-based competitive advantage in its domestic market. The bank we studied implemented a differentiation strategy by positioning itself as a “South American Bank” and by offering a set of foreign trade services to its domestic clients that were unique at the time of their introduction. Our conceptual model fills a gap in the literature on difficulties in internationalization by explaining under what conditions internationalizing firms may opt for a strategy that seeks to domestically exploit resources and capabilities that have been developed in the course of internationalization. © 2010 Elsevier Inc. All rights reserved.

1. Introduction Previous internationalization research has addressed the consequences of liability of foreignness (LOF) in terms of survival, profit rates and efficiency (Zaheer, 1995; Zaheer and Mosakowski, 1997; Miller and Parkhe, 2002), as well as the question of how internationalizing firms respond to the challenge of “overcoming the liability of foreignness” (Zaheer, 1995; Delios and Beamish, 2001; Luo et al., 2002; Mezias, 2002; Eden and Miller, 2004; Gardberg and Fombrun, 2006; Elango, 2008; Barnard, 2010). We know less, however, about alternative strategies that might be adopted when it is too costly to overcome the liability of foreignness, which results from institutional distance and is defined as “the unfamiliarity, relational and discriminatory hazards that foreign firms face and domestic firms do not” (Eden and Miller, 2004: 8). By suggesting that already internationalized firms may choose an intermediate strategy (“exploiting the liability of foreignness”) between successful internationalization (“overcoming the liability of foreignness”) and de-internationalization (Benito and Welch, 1997; Benito, 2005) (“being defeated by the liability of foreignness”), we fill a conceptual gap in internationalization research. In an attempt to move beyond Luo et al. (2002), who propose four defensive strategies for reducing dependence on the host country environment, we develop a conceptual framework that intends to answer the following research question: why and under what conditions may service firms exploit their international affiliate network at home? In-depth research on possible motives for such intermediate strategies is important because, although previous studies have demonstrated that a considerable portion of already internationalized firms opt for “home reorientation” strategies, implying that “international expansion seems to go hand in hand with domestic expansion” (Fortanier and Tulder, 2009: 241), we do not know why and how this occurs. Likewise, although past research on advertising agencies suggested that internationalization raised the market power in the domestic market, possibly due to some kind of synergy (Aydin et al., 1984), we do not know how and under what conditions this may happen. We argue that excessive liability of foreignness, the domestic competitors' degrees of internationalization, domestic market size and the service firm's domestic presence increase the probability of exploiting an international affiliate network for a domestic market differentiation strategy. We derive these conditions from a resource-based view of the firm (RBV) and ⁎ Tel.: + 55 11 4504 2786. E-mail address: [email protected]. 1075-4253/$ – see front matter © 2010 Elsevier Inc. All rights reserved. doi:10.1016/j.intman.2010.09.011

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demonstrate that the simultaneous presence of these conditions is likely to result in sustained competitive advantage at home (Barney, 1991, 2002). A complementary underlying rationale is that the cost–benefit relationship of further expanding abroad is significantly less advantageous than that of the alternative choice of exploiting the existing international affiliate network at home. Hence, this study extends literature on difficulties in internationalization (e.g., Cuervo-Cazurra et al., 2007; Madhok, 2010) by theorizing on a strategy service firms may implement when they face such difficulties. Thus, our study adds a resource-based explanation for a hitherto neglected, and somehow paradoxical, internationalization outcome: internationalization as a domestic market differentiation strategy, an alternative that may avoid or respond to internationalization difficulties. At the same time, the study contributes to the network view of international business by drawing attention to an application of this perspective thus far unexplored. Moreover, our study is empirically relevant because we provide the first detailed account of a prominent Brazilian bank's internationalization in particular, and probably of a bank originated in an emerging economy in general. Being a bank that has created competitive advantages through internationalization, it has followed a different logic compared to the subjects of previous research on financial service internationalization (Carman and Langeard, 1980; Tschoegl, 1987; Vandermerwe and Chadwick, 1989; Miozzo and Soete, 2001; Lovelock and Yip, 1996; Rugman, 2006; Buch, 2003). We chose a bank to illustrate our model because it permits us to hold industry characteristics constant and thus facilitate a comparison with the results of a previous research that addressed LOF in the financial service sector (Zaheer, 1995; De Young and Nolle, 1996; Zaheer and Mosakowski, 1997; Miller and Parkhe, 2002; Petrou, 2007). Our model makes a practically relevant contribution by informing executives on how they may deal with excessive liability of foreignness during their firms' internationalization process. 2. Theoretical background We argue that the choice for an intermediate strategy between further expansion abroad (overcoming the liability of foreignness) and de-internationalization (being defeated by the liability of foreignness) depends on the relationship between the degree of liability of foreignness (LOF), the firms' internal resources and capabilities (R&C) and the costs of further domestic market expansion, which we call barriers to domestic expansion (BTDE). This concept has been derived from “liability of expansion” (Cuervo-Cazurra et al., 2007), which can be applied to expansion in domestic markets, for example, when firms expand from the local to the regional and national level or when firms diversify into different market segments. The relationships between R&Cs and LOF, on the one hand, and between R&Cs and BTDE, on the other, permit us to construct four strategic implications (see quadrants I, II, III and IV in Fig. 1), which we will explain below. The costs of doing business abroad (CDBA) can be broken down into two components: liability of foreignness (LOF) and activity-related costs, due to trade barriers, communications and transportation (Eden and Miller, 2004). In line with Hymer's (1976) work, LOF itself has been divided into three elements: unfamiliarity, discrimination and relational hazards (Eden and Miller, 2004). Unfamiliarity hazards relate to the lack of experiential knowledge in the host country environment that makes information-gathering more difficult to foreigners and eventually results in information asymmetry between foreign and local firms. Discrimination implies a differential treatment of foreign firms on institutional grounds, such as preconceptions, ethnocentric and political reasons (e.g., “buy national products” campaigns). Relational hazards refer to uncertainties firms face when organizing their internal (staff) and external (suppliers and buyers) business relationships (governance costs). Empirical studies have provided evidence for LOF, showing that foreign firms often perform less well than domestic firms (De Young and Nolle, 1996; Miller and Parkhe, 2002). Because of this, foreign firms have adopted strategies in order to overcome or mitigate the LOF and ultimately increase performance. Theoretical and empirical researches have pointed to the importance of the entry mode choice (Eden and Miller, 2004); intangible resources, such as R&D, patents, brands and advertising capabilities (Delios

Foreign Market R&C

R&C

Domestic Market R&C

LOF

R&C

LOF

I. Overcoming LOF BTDE and both continue expansion abroad & differentiate at home

II. Internationalization as a domestic market differentiation strategy (focus of this study)

III. Continue expansion abroad, no other BTDE choice

IV. Deinternationalization or exit strategy

Fig. 1. Strategic choices between foreign and domestic market expansion.

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and Beamish, 2001); legitimacy-building strategies (Kostova and Zaheer, 1999), such as cross-listings on foreign stock exchanges, corporate diplomacy, corporate social responsibility, bargaining with host country governments and local networking (Luo et al., 2002; Eden and Molot, 2002; Gardberg and Fombrun, 2006); or boundary-spanning strategies (Elango, 2008). Multinational banks from developing countries, for instance, may build a reputation and legitimacy by establishing a presence in the world's main financial centers (Petrou, 2007). Conceptually speaking, whether a firm can overcome LOF and continue to expand abroad or not depends on the competitive advantage derived from resources and capabilities (R&Cs) (Nachum, 2003; Hymer, 1976; Dunning, 1988). If the internationalizing firms' R&Cs are valuable, rare, difficult to imitate and organizationally exploitable, then the firm possesses a sustained competitive advantage (Barney, 2002) and will be able to overcome LOF. Hence, the firm is in a position to continue its international expansion (these strategic options correspond to quadrants I and III in Fig. 1). However, depending on the institutional conditions (Eden and Miller, 2004), bundles of R&Cs may create competitive advantages in some markets but not in others. For instance, while firms from developing countries often have competitive disadvantages, especially when they enter advanced country markets, they may have competitive advantages when they enter the markets of other developing economies, as they are already familiar with their institutional characteristics (Cuervo-Cazurra and Genc, 2008). For this reason, MNCs from emerging economies suffer from the dual disadvantage of the “liability of emergingness” (Madhok, 2010), which exceeds the LOF faced by MNCs from advanced economies, and from a lack of sufficiently compensating R&Cs (Barnard, 2010). Nonetheless, being focused on different kinds of foreign markets, internationalization research has mostly neglected the domestic market of the internationalizing firm, Aydin et al. (1984) and Fortanier and Tulder (2009) being noteworthy exceptions. This may be due to the assumptions that internationalizing firms already have competitive advantages before they go abroad (Hymer, 1976; Dunning, 1988; Fahy, 1996; Rugman, 2006) and that they become strong in their home markets before they expand internationally, as suggested by the stages model (Johanson and Vahlne, 1977). However, these assumptions do not always hold due to the difficulty of protecting innovations in some service industries (Guillén and Tschoegl, 2000; Fieleke, 1977). Compared to the times before going abroad, the focal firm's competitiveness in its domestic market may have changed because the firm has built up new R&Cs during its internationalization process. These R&Cs may be a result of learning (Johanson and Vahlne, 1977, 2003; Benito and Gripsrud, 1992) or may consist in its international affiliate network. The latter may be particularly pertinent in network industries. Similar to the telecommunications industry, the transportation, information and financial services sectors can be considered network industries. “Network industries can be defined as those where the firm or its product consists of many interconnected nodes, where a node is a unit of the firm or its product, and where the connections among the nodes define the character of commerce in the industry” (Gottinger, 2003: 1). Similar to a telephone in a telecommunications network, a freight forwarder's or a bank's branch office constitutes a node in their respective networks, which may communicate with other nodes through telecommunications (cable and radio), transport (roads, ship lines or airlines) and information infrastructure. Under what conditions does such a network represent a valuable firm resource? First, we need to address the relationship between network size and value, which, as such, draws on the network effect (or network externalities) as its underlying principle. Economists distinguish between indirect and direct network effects. They have argued that “the demand for a network good is a function of both its price and the expected size of the network” (Katz and Shapiro, 1994: 96). In transportation, for instance, the positive feedback or direct network effect implies that the more different destinations (or nodes) an airline offers to its clients for accessible prices, the more potential clients it attracts. The nature of the relationship between network size and value is a controversial issue and probably depends on industry characteristics (Gottinger, 2003). While some have advocated an exponential relationship between size and value in the network industries belonging to the New Economy (Metcalfe, 1995), other network industries may be subject to a logarithmic or linear relationship. A logarithmic relationship, in which the marginal value of new nodes shrinks as the network grows, may apply to the transportation, financial services or advertising industries, for instance, because for firms that are at the brink of over-expanding, the geographical coverage of a new branch or client access point would be limited by the coverage of already existing branches, implying a reduction of the potential client base. Secondly, the network of a firm's domestic and foreign affiliates, such as subsidiaries, representative or branch offices, can be considered a resource, similar to the way external networks have been considered firm resources (Lavie, 2006). From its international, intra-organizational network, a firm may derive new resources as well as new services for its clients. As is widely known, network nodes may access external resources, such as information, know-how, technological capabilities and financial assets (Chen, 2003). In addition and looking inside the network, employees dealing with the complex challenges of maintaining an international, intra-firm network develop tacit knowledge, soft skills (e.g., languages and intercultural communication), and managerial and entrepreneurial capabilities (e.g., envisaging new business opportunities by linking network nodes). The central issue of this study is to examine under what conditions the focal internationalizing firm may exploit its new R&C domestically. The focal firm has an incentive to exploit its R&Cs at home; but when its R&Cs are not sufficient to overcome its LOF in foreign markets, it may only be able to do so if its R&Cs are adequate to overcome the barriers to domestic expansion (BTDE) (see quadrant II in Fig. 1). If the latter were not the case, however, the only strategic option would be an exit strategy, e.g., a merger with a stronger partner or a de-internationalization strategy (Reiljan, 2004; Benito and Welch, 1997, Benito, 2005) in order to focus all available resources in only one market (see quadrant IV in Fig. 1). One of the major barriers against leveraging international R&Cs domestically is the domestic market size. For the same reason that motivates firms from small countries to go abroad early (Benito et al., 2002), the costs of exploiting international R&Cs at home may not be feasible when the domestic market segments are too small, as the firm would not be able to capitalize on scale economies. The domestic competitive intensity may also have grown considerably, and other domestic competitors may have built

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up comparable international R&Cs by similar international expansion strategies in the meantime. In this case, the chances to create a sustained, domestic competitive advantage primarily based on international R&Cs may be limited because the focal firm's international resources would no longer be sufficiently rare to differentiate it from domestic competitors. A further reason for high BTDE compared to R&Cs may result from the requirement of heavy domestic investments, e.g., if the focal firm's presence in a large domestic market is small, and investment needs to overstretch its R&Cs. Having said this, the remainder of our study develops a conceptual model and propositions that explain under what conditions an internationalizing firm is likely to implement the strategy displayed in quadrant II of Fig. 1: a domestic market differentiation strategy using resources and capabilities derived from its international presence.

3. Research method 3.1. Research design and context This research develops a conceptual model based on theoretical arguments and inspired and illustrated by a case study. Due to the sale of Banco Real to foreign banks in 1998 and 2007, our qualitative information is probably less biased because our interviewees are no longer subject to confidentiality and are therefore not obliged to withhold formerly strategic information. A single case may be sufficient when the aim is to identify new concepts or to challenge existing views of the world (Yin, 2003; Dyer and Wilkins, 1991, Ghauri, 2004). Following Siggelkow (2007), we used the case material both inductively, as inspiration for new ideas or theories, and to illustrate our conceptual model. The Brazilian banking sector provides interesting research opportunities. Brazilian banks' presence abroad is still limited, although several of the largest private banks imitated Banco Real's internationalization from the 1980s onward. Against this background, the internationalization initiated by Banco Real in the 1970s can be considered the most prominent case, particularly as its international presence put it, according to an industry insider, approximately 10–15 years ahead of its domestic private competitors at the beginning of the 1990s. 3.2. Data collection and analysis Collecting historical data regarding the internationalization process of Banco Real faced several difficulties. Many of the bank's former executives are no longer available, and internal historical documents are inaccessible due to the mentioned changes in ownership. Nevertheless, we made an effort to reconstruct past reality based on participants' (insiders' and outsiders') perceptions. However, retrospective interview data may suffer from ex-post rationalization or difficulties in remembering important details. Therefore, interview data was complemented by articles from historical financial market publications, annual reports and print advertisements (triangulation). Additionally, we used data on commercial banks' performance and trade flows between Brazil and its main trading partners in Latin America and Africa in order to check the interviewees' statements against quantitative data. All seven interviewees occupied senior positions at Banco Real and were responsible for the internationalization strategy and its implementations. They had former assignments in Africa, Europe and North and South America (see Table 1 for details). The interviewees' employment at Banco Real covered the years from the beginnings of Banco Real's internationalization (early 1970s) through the time when the outcomes of the internationalization process were measurable (from the late 1970s through the 1990s) and up to its sell-off to ABN Amro in 1998. Furthermore, four senior executives from Banco Real's business context (industry executives external to Banco Real from competitor banks Bamerindus, Banco Econômico, Banco Excel, Banco Mercantil de São Paulo, the Brazilian Central Bank and from the Brazilian Finance and Economics Ministry) were asked to revise drafts of the case study and to provide us with written statements with respect to the main arguments and counter-arguments presented in our analysis (some of these statements were quoted in this article). The resulting exchange of arguments led to a refinement of case-relevant information and helped to corroborate our insights. We indicated the respondent's last name in brackets after each quotation in this article.

4. Conceptual model and empirical illustration This section proposes a conceptual model (see Fig. 2) that seeks to explain under what conditions a service firm is likely to redirect its internationalization strategy, using its international network to build a differentiation-based competitive advantage in its domestic markets. Succinctly, this is likely to happen when the internationalizing firm's resources and capabilities (R&Cs) are too weak to overcome liability of foreignness (LOF) in certain countries, limiting further international expansion, but are, simultaneously, strong enough to offset the barriers to domestic expansion (BTDE) (see Fig. 1). Resources and capabilities may sustain different kinds of competitive strategies, for instance, cost leadership or differentiation strategies (Duncan et al., 1998). A differentiation strategy may be based on innovation in product or service offerings, uniqueness, strong marketing and branding, or superior customer service (Porter, 1985). In line with the VRIO framework (Barney, 2002), a service firm is likely to create a differentiation-based, sustained competitive advantage in its domestic market if its international network and related resources are valuable, rare, difficult to imitate and exploitable by organization.

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Table 1 Profiles of interviewees. Institution

Former positions

Period

Last name

Nationality

Banco Real

Director, Foreign Trade Department Various directorate positions (financial, administrative director), CEO, Banco Real Group General Manager, New York branch office Director, International Department and Insurance Division of Banco Real Group Various executive positions in the Banco Real Group Credit Analyst International Department CEO, Banque Real de Côte d'Ivoire (subsidiary Ivory Coast) Deputy Head, European Sector, London Deputy Director, International Department, São Paulo Head, European Sector, London Director, International and Foreign Exchange Department, São Paulo Deputy Director Ivory Coast General Manager, Bolivia General Manager, International Department, São Paulo CEO, Banque Real de Côte d'Ivoire (subsidiary Ivory Coast) Account Manager, Miami General Manager, Chile branch office Account Manager, Banco Real de Colombia Vice President of Banco Real de Colombia General Manager, Madrid branch office General Manager, Chile branch office Chile branch office (with activities in Colombia) European Sector, London Deputy General Manager, Madrid branch office General Manager, Buenos Aires branch office Manager, European Sector, London Director of Unit Responsible for MNC clients, São Paulo President, Banco Real Colombia

1971–1975 1976–1998

Ribeiro

Brazilian

1972–1975 1975–1977 1977–1998 1975–1977 1977–1980 1980–1986 1986–1987 1988–1990 1990–1998 1981–1984 1984–1988 1988–1989 1989–1994 1994–1995 1995–1998 1979–1982 1987–1990 1990–1993 1993–1995 1977–1983 1981–1986 1986–1992 1992–1995 1986–1987 1987–1994 1994–1996

Vasconcelos

Brazilian

Cunha

Brazilian

Gonçalves

Brazilian

Uribe

Colombian

Sánchez

Chilean

Fernández

Colombian

Proença Castor Nobre

Brazilian Brazilian Brazilian

Nóbrega

Brazilian

Banco Real

Banco Real

Banco Real

Delta Bank (same Group) Banco Real Banco Real

Banco Real

Banco Real

Business and institutional context of Banco Real Banerindus Director of Banco Bamerindus, Brazil (today HSBC) Banerindus Director of International Department, Banco Bamerindus, Brazil (today HSBC) Central Bank Director, Foreign Exchange Department Banco Mercantil de São Paulo Banco Excel Banco Econômico Banco do Brasil Ministry of Industry and Commerce Ministry of Finance Eurobraz (London) Ministry of Finance Ministry of Finance MCM Consultores Tendencias

London branch office Vice president of Foreign Exchange Department Vice president of Foreign Exchange Department Senior staff Senior staff

Before 1987 and 1990–1992 1988–1990 1993–1995 1996–1998 1970–1977 1977–1979

Senior staff Exec. Director General Secretary Minister of Finance Consultant Consultant

1979–1985 1985–1987 1987–1998 1988–1990 1990–1997 1997–today

4.1. An international intra-organizational network and related resources As explained in Section 2, the size of an international network is a key variable that is directly related to opportunities to reach clients and generate services, resources and profits. In addition to the value derived through network externalities — the larger the networks, the more clients can be connected (at least up to a certain limit) — firms in network industries that establish their intra-organizational networks may also create internal assets by absorbing external knowledge and information and by internally learning how to deal with the mounting complexity of increasing intra-firm networks, in particular, when they cross the boundaries of countries and cultures. Thus, to the extent that the size of the intra-firm network increases, more value is generated for domestic customers (up to a certain point). Due to time-compression diseconomies, interconnectedness and causal ambiguity (Dierickx and Cool, 1989), it may be difficult for domestic competitors to quickly imitate such an advantage. Proposition 1. A service firm in a network industry may use its international, intra-organizational network to develop a competitive advantage in its domestic market. The competitive advantage is likely to increase with the size of the international network. 4.1.1. Banco Real's international network and derived services As a result of the internationalization process, in 1992 Banco Real was the most internationalized Brazilian private bank, with almost 80 operations (subsidiaries, branches, agencies and representative offices) abroad (see Table 2). Despite its presence in North and South

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Internationalization of Domestic Competitors Domestic Market Size and Presence

Barriers to Domestic Expansion (BTDE)

-P 2 International Intra-organizational Network and related resources and capabilities (R&Cs)

+P3 +P5

+P1

Competitive Advantage in Domestic Market

+P4

Liability of Foreignness (LOF) Fig. 2. Conceptual model.

America, Europe and Africa, the emphasis was on South America, where Banco Real became the “largest private player in regional trade” (Nobre). As far as Africa is concerned, Banco Real originally expected in the 1970s that commercial ties between Brazil and African countries would increase over time, given the government's policy of expanding Brazil's sphere of political and economic influence in Africa. However, Banco Real's subsidiary in Ivory Coast and its branch in Gabon were not instrumental to the bank's strategy of using its foreign affiliate network to differentiate itself in its domestic market, because the trade volume between Brazil and Africa remained too low. For this reason, the bank withdrew from the African continent by 1994. The core international network of subsidiaries and branch offices constituted the crucial resource that underpinned the development of foreign trade services, synergy effects, the creation of specialized knowledge and the acquisition of financial resources from abroad. Table 2 The internationalization process of Banco Real. Interviews; Gazeta Mercantil–Balanço Anual, September 30, 1981, 5(5): 39–42; Banco Real annual reports (1987–1988); Banas Brasil Financeiro (several years). Year of Opening

Country

Market Entry Mode

1958 1964 1970

USA USA Paraguay

1973 1974 1974 1970s 1970s 1970s Before 1977 Between 1972 and 1975 1973/74

USA USA USA Canada Cayman Islands Nassau Curação Panama Uruguay

1974 Before 1976 Between 1975 and 1977

Chile Mexico Colombia

1975/76 1976 1977 1977 1979/80 1979 Before 1986 1983/84

Bolivia Ivory Coast Argentina United Kingdom Gabon Germany Portugal Spain

End of 1980 s

Venezuela

New York (first representative office of a Brazilian bank abroad) New York representative office was converted into a full branch Subsidiary: Banco Real del Paraguay S.A. Takeover of a local bank with eight branches Agency in Washington Agencies in Los Angeles and Miami Subsidiary Banco Real International Inc. in Chicago and Houston Representative office in Toronto Branch office Branch office Branch office Branch office in Panama City Subsidiary: Banco Real del Uruguay Takeover of a local bank with 14 branch offices Branch offices in Santiago (total of 3 branch offices) Representative office Representative office and Subsidiary Banco Real de Colombia; Banco Real set up a network of 29 branches in Colombia and became a local retail bank. Three branches in La Paz and Santa Cruz de la Sierra Subsidiary: Banque Real de Cote D'Ivoire S.A., sold in 1994 Branch office in Buenos Aires Branch office in London Branch office in Libreville, closed in 1987 Branch office in Frankfurt Representative office in Lisbon Branch office in Madrid; Entry after debt crisis due to opportunities provided by Spanish banking regulations Representative office in Caracas closed in 1992

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4.1.1.1. Financial resources. While the bank's branch offices in South America were focused on foreign trade finance and related services, its branch offices in the main financial centers (several branch offices in the USA, London, Frankfurt, and Madrid) as well as Panama were focused on capturing the financial resources to make these services possible. 4.1.1.2. Reputation. By owning a large set of branch offices abroad, Banco Real experienced an upgrade, improving its image in the eyes of the international financial community. In particular, its presence in the world's main financial centers had important signaling effects, as prior approval of the host countries' Central Banks was compulsory. “Running a branch office in Frankfurt, foreign partner banks noticed how the bank was working. The resulting credibility facilitated obtaining credit lines that headquarters at home could then use for pre-export financing.” (Cunha) This reputation translated into financial benefits for the bank's clients. A former manager of the New York branch office remembers: “Due to our more direct relationships with international banks, we were highly respected [by foreign banks] which translated at the end of the day to a lower cost of money compared to our competitors here in Brazil.” (Vasconcelos)

4.1.1.3. Specialized knowledge. Almost all respondents pointed out that Banco Real was able to develop specialized knowledge of credit and risk analysis of clients located abroad as well as international hedging. These capabilities added value to domestic clients' foreign trade operations.

4.1.1.4. Synergy. One of the most important business opportunities was the cross-selling of services among foreign branch offices and subsidiaries, which had been considered from the beginning of the internationalization process: “Look, another issue that I believe is important to mention was cross selling, I mean, it was very common, and this was the policy of the bank: that the account managers of one country visited firms in another country. Then, for instance, if an account manager managed Xerox in Brazil and came to Colombia and visited Xerox [of Colombia], one looked for synergies and possibilities for cross selling, which resulted to be very interesting; then the commercial forces in different countries collaborated with each other, and, in addition, they carried out joint training.” (Uribe) “Having a presence abroad, we very often knew the buyer. Let me give you an example. Let's suppose Usiminas exported to Germany, and we knew the buyer there. Then we could finance Usiminas with the guarantee of the buyer, or we could finance the buyer directly so he could pay cash to Usiminas. But these were other times, we were large financers of Embraer airplanes; our branch office in London knew the aeronautics market very well, so we financed many Embraer planes, and we financed the firms abroad that bought Embraer planes as well. Well, this means that being there abroad created a business opportunity that a corresponding bank did not [offer].” (Ribeiro)

4.1.1.5. Foreign-trade services. Advertisements published in major Brazilian business publications support these testimonials; in 1974, an ad clearly established a relationship between the recent inauguration of a subsidiary in Montevideo, Grupo Real del Uruguay, and making “available to the national market a broad set of services, which range from financing to information about all areas of the Uruguayan economy, industry, agriculture, commerce, exports, imports, etc.”1 Already in 1973, Banco Real used its international presence to sell value-added services to its Brazilian clients, emphasizing import and export financing, and foreign trade-related information services about potential export markets and international sourcing opportunities.2 These services extended even to specialized insurance and resulted in genuine financial benefits for its clients: “As we had a very good relationship [with Embraer], we financed many of her products for foreign markets and (…) we started to put together their insurance of product liability (...) This insurance cost was rising almost geometrically the larger the aircrafts became. (…) we started to see who were the underwriters of aircraft risks in the world and brought them to Brazil in order to get to know Embraer, and we took the guys from Embraer to London in order to present their company. This made it possible to reduce the insurance premium by 20% of what she paid at the beginning, despite her expansion.” (Vasconcelos) By 1982, Banco Real had further extended its foreign trade-related services, covering, in addition to financial and information provider services, foreign trade services customarily provided by trading companies: “And by means of its ‘Trading Company,’ Banco Real promotes, finances, disseminates and makes possible the commercialization of everything that is produced by your company.”3 Banco Real was also the leading intermediary of the government's export financing programs, initially using the system FINEX and later PROEX. 1 2 3

Source: Banco Real advertisement published in Brasil Financeiro, BANAS, 1974/75, p. 159. Source: Banco Real advertisement published in Brasil Financeiro, BANAS, 1973/74, pp. 296–297. Source: Banco Real advertisement published in Gazeta Mercantil–Balanço Anual, 1982, p. 41.

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Finally, comparing Banco Real's advertising strategy with advertisements of competitor financial institutions suggests that Banco Real's messages in the 1970s were unique: while competitors stressed their large domestic presence, Banco Real strongly stressed its international presence.4 In sum, these insights from Banco Real support the notion that a positive network effect and extensive internal resourceand capability-building were present. Similar to the telephone in the telecommunications (network) industry, which becomes more useful as more people are connected to the same network, an exporter's (importer's) bank account in a domestic bank branch provides (low-cost) access to a range of foreign trade services, whose utility increases with the number of foreign importers (exporters) that possess a Banco Real account in one of its branches abroad. By managing related transactions, Banco Real accumulated substantial resources and capabilities. 4.2. Internationalization of domestic competitors The following two propositions address the relationship between internal resources and capabilities (R&Cs) and the barriers to domestic expansion. Whereas the well-known oligopolistic reaction argument suggests that firms follow their competitors abroad in oligopolistic industries (see, e.g., Terpstra and Yu, 1988), we focus on the first mover and claim that service firms' internationally developed R&Cs increase the likelihood of creating domestic competitive advantages, provided the overwhelming majority of existing competitors in the same market segment is not internationalized yet. Patently, if many competitors were already internationalized, two crucial conditions for a differentiation strategy, innovativeness and uniqueness, would not hold. From a resource-based perspective, the rarity condition (Barney, 1991, 2002) would not hold if many competitors had obtained identical resource and capability bundles through similar internationalization strategies. Under such circumstances, the focal firm's R&Cs would be insufficient to make up for domestic competitors'advantages (R&Cs b BTDE). Inverting this argument (BTDE b R&Cs), we propose: Proposition 2. A service firm in a network industry is more likely to use its international, intra-organizational network to build a differentiation-based competitive advantage in its domestic market, the lower its domestic competitors' degree of internationalization in the same market segment. 4.2.1. Comparing Banco Real's degree of internationalization to domestic competitors Concerning private commercial banks, a small group dominated the scene in the 1970s (in order of size): Bradesco (largest), Banco Itaú, Unibanco, Banco Nacional (later acquired by Unibanco) and Bamerindus (today HSBC). In addition, there were two major state-owned banks: Banco do Brasil and the São Paulo state bank, Banespa. Apart from these, there were many smaller, often regionally focused banks in addition to smaller public banks owned by the governments of federal states. In the 1970s, only one private bank (Banco Real) and two state banks were internationally active. Banco do Brasil and Banespa5 were operating basically as an extension of their governments and often playing a political role as a tie between the Brazilian (federal and São Paulo state) government and the host country's governmental agencies. Articles published in business magazines confirmed the low degree of competitors' internationalization: “When all were looking inside the country, the bank [Banco Real] opened up abroad (…) envisioning things in an anticipating manner (…) the sixth largest private business group […] being present today all over Brazil and in more than 15 countries, decided to extend itself abroad when everybody was only looking to the domestic market.” (Emphasis by the author, Gazeta Mercantil–Balanço Anual, September 30, 1981, volume 5, number 5, p. 39, São Paulo) Although the two state-owned banks were internationally present as well, Banco Real was still able to exploit its own international presence as a competitive advantage, being considered agile and client friendly6: “There were two Brazilian Banks that one could normally find on the international market: Banespa and Banco do Brasil (…) which were state banks and because of that they represented bureaucracy, and things did not flow as smoothly as they did at Banco Real; their presence was evident, but the way business was done (…) was complicated.” (Uribe) Indirect evidence from Banco Real's advertisements confirms the interview statement and suggests that Banco Real emphasized customer service orientation to differentiate itself from its domestic, state-owned competitors (Banespa and Banco do Brasil) with similar or even larger international affiliate networks: “In case of an import transaction, we call directly our branch office in New York, and we serve you with the same speed. You face [diverse] prices and equipment characteristics and then, then you discover the best option. There, our manager cares instantly for all the purchasing formalities. Rapidly, rapidly, the financing of the new installations will be released and we finance whatever your expansion plan requires, including working capital and the acquisition of know-how.” (Emphasis by the author; source: Advertisement published in Brasil Financeiro, BANAS, 1973/74, pp. 296–297) 4 While Banco Real stressed its international presence, competitor Banks' advertisements emphasized their strong presence in Brazil (e.g. “Banco Itaú: 700 branch offices all over Brazil”, Bamerindus: “300 Bamerindus branch offices distributed over Brazil”). 5 In the 1990s, Banco do Brasil owned 48 operations abroad, and Banespa owned 18 (Burle, 1995, p. 14). 6 Banco Real's advertisements in the early 1970s were already exploiting these service qualities.

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Consequently, we conclude that Banco Real positioned itself as the only efficiently operating private bank that had created R&Cs based on its international presence and that could use them to compete effectively against its domestic competitors.

4.3. Size of the domestic market and the domestic presence Previous research has already emphasized the relationship between domestic market size and internationalization: firms from small economies tend to internationalize earlier than firms from large economies, owing to market saturation and limited opportunities to capitalize on economies of scale (Benito et al., 2002). Turning this argument on its head, the barriers to domestic expansion (BTDE) would probably be lower for those internationalized firms whose home country is large. When the focal firm already has a considerable domestic presence, it can leverage its international R&Cs domestically at even lower additional investments (BTDE bb R&Cs). Moreover, domestic and international presences can be regarded as synergy-creating complementary resources. This means that the international, intra-organizational network can be more effectively exploited by the domestic organization when more domestic organizational units access the international network (see above comments on synergy and the network effect). In brief, this proposition addresses the “I” and the “O” of the VRIO framework (Barney, 2002). Proposition 3. A service firm in a network industry is more likely to use its international, intra-organizational network to build a differentiation-based competitive advantage in its domestic market, the stronger its presence in its domestic market and the larger its domestic market.

4.3.1. Combining Banco Real's domestic and international network Although The First National City Bank inaugurated a branch office in Rio de Janeiro as early as 1915,7 with Bank Boston following in 1947, and Chase entering the Brazilian market in 1952 (Cattani and Tschoegl, 2002), only Brazilian banks had a large domestic branch network in the 1970s and 1980s. Banco Real's presence covered all of the Brazilian territory, with 536 domestic branch offices in 1975 and 642 branch offices in 1986. In addition, the bank operated 17 domestic foreign exchange branches in 1986, located in all major industrial centers. In 1980, The Real group employed 50,000 staff members in Brazil and 2000 abroad.8 The fact that it figured during all the 1970s and 1980s among the top five or six Brazilian banks in terms of deposits9 is another indicator of its strong local presence. Compared to its local and international competitors, Banco Real's combined domestic and foreign branch office network was unique and difficult to imitate. Asked whether foreign competitor banks with a presence in Brazil could not have offered the same services as Banco Real did, one of our interviewees made explicit that Banco Real's strong domestic presence served as protection from the competitive strength of international banks: “Well, in my opinion, it was not easy for them [foreign banks in Brazil]. I think that a bank such as Citibank, without doubt did know more than Banco Real, but Banco Real was a large bank inside Brazil. Citibank was not a large bank inside Brazil, thus if Banco Real could obtain this expertise abroad, it ended up in very favorable conditions, very favorable. (…) But, I repeat, in my opinion, these were two sides of the same coin. On the one side, the international presence and the experience that this international presence helped to gain, and on the other side, the domestic presence, which was very important in Brazil. It was a large retail bank, then this also allowed it to have a very strong presence. If one managed to add up the two parts of the equation [the domestic and the international presence], then one received benefits.” (Fernández) As can be inferred from advertisements and slogans, Banco Real consciously exploited its combined domestic and international organizational network (“Banco Real in Brazil and abroad”) to differentiate itself from potential competitors: “The Real Group has a commercial bank with branch offices all over Brazil. And in the United States, Colombia, Paraguay, Uruguay, Mexico, Panama, Nassau, Curaçao and Grand Cayman.” (…)(Banco Real Advertisement, Source: Brasil Financeiro 1976–77, p. 35) From a resource-based perspective, a large domestic market and a large presence in this market can make imitation by foreign multinational service firms more difficult: a foreign multinational service firm might offer an even larger international branch office network, but it will probably not match the internationalizing firm's domestic market presence unless it takes over a large domestic competitor. Consequently, the foreign multinational service firm will not be able to reach the same number of domestic clients. These pieces of evidence illustrate how a financial service firm leverages its international network and related R&Cs at home while facing low BTDE due to its strong presence in a large home market (Brazil). 7 8 9

Banas Financeiro 1972/1973, p. 158. Banas Financeiro 1976/77, p. 52; Banas Financeiro 1977/78, p. 47; Gazeta Mercantil–Balanço Anual, pp. 40–42; Banco Real's annual reports 1986 and 1987. See several annual business publications, such as Gazeta Mercantil–Balanço Annual, Visão–Quem é quem na economia brasileira or Exame Melhores e Maiores.

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4.4. Liability of foreignness (LOF) Whereas the preceding propositions addressed the relationship between BTDE and R&Cs, the following arguments address the relationship between the liability of foreignness (LOF), or the liability of outsidership (Johanson and Vahlne, 2009), and R&Cs. To expand their activities abroad, internationalizing firms need to overcome liability of foreignness using their competitive or ownership advantages (Hymer, 1976; Dunning, 1988). However, conventional approaches to overcoming liability of foreignness, based on innovation and technology, are probably less effective in service industries, as innovations in banking services cannot be patented, disseminate rapidly and make it difficult to exploit competitive advantages abroad (Guillén and Tschoegl, 2000). In fact, previous studies found that LOF is pervasive even among US retail banks' international operations (Fieleke, 1977). The difficulty of overcoming liability of foreignness is even more aggravated when firms from developing economies enter advanced countries (Cuervo-Cazurra and Genc, 2008; Hu, 1995; Madhok, 2010; Wright et al., 2005). Institutional distance may come into play because firms from developing countries may be regarded as inferior with respect to the quality of their products and services, their reputations as reliable partners or simply their respective degree of solvency (Bartlett and Ghoshal, 2000). Markedly, this problem may even increase in highly reputation-based service industries, such as insurance, financial services or consulting, because there is no ready-made tangible product that can be subjected to an in-depth quality analysis. The problem becomes further aggravated when the reputation of the firm's country of origin does not support the reputation of the firm's products and services. For instance, whereas tropical countries' image may help to internationally commercialize tropical products, such as exotic fruits, juices, rum and hammocks, such an image may simply not match the idea of high-technology products or sophisticated banking services. In such situations, where institutional distance is especially high, discrimination hazards may become particularly pronounced (Eden and Miller, 2004). The aforementioned rationale describes situations in which LOF becomes excessive when compared to the internationalizing firms' R&Cs. Consequently, the focal firm would probably avoid further expansion abroad and consider domestically exploiting its R&C gained through international expansion. Although the domestic exploitation of the international affiliates network can also happen when the LOF is not present, the incentive to do so is stronger the higher the LOF becomes. However, in line with the preceding propositions, domestic exploitation of R&Cs requires that these R&Cs compensate for BTDE at the same time. Proposition 4. A service firm in a network industry is more likely to use its international, intra-organizational network to build a differentiation-based competitive advantage in its domestic market, the higher its liability of foreignness and the lower its barriers to domestic expansion. 4.4.1. Liability of foreignness in the case of Banco Real Banco Real expanded as a retail bank in institutionally closer and economically weaker developing countries, such as Paraguay, Uruguay and Colombia (see Table 2). However, Banco Real's operations in developed nations, e.g., seven units in the USA and Canada and four in Europe, were not used as a beachhead to create a larger presence abroad. Rather, their function remained limited to accessing credit in foreign currency and developing foreign trade financing and related services, as described above. Similarly, in more competitive Latin American markets, such as Argentina and Chile, Banco Real “concentrated itself on trade and on the financing of a few large firms” because Chilean “banks were very, very competitive and had a large branch network” (Vasconcelos). Asked about the main challenges faced by the bank in the 1970s, the former general manger of the New York branch office comments: “It was a certain form of prejudice. I felt this very specifically in New York. In a certain way, there was a kind of skepticism of the business environment that a Brazilian institution, despite being recognized, despite having a traditional relationship with the [partner institution], could go much beyond the country where its headquarters was located. Well, this perception continues until today.” (Vasconcelos) In a similar vein, the former president of the bank commented: “Well, over time (…) there was some frustration as successive external and Brazilian crises made and make the fact that you are a Brazilian bank or a bank from a non-developed country a very strong label (…) it is difficult that you succeed to install yourself in that country, and the more advanced the country, the more difficult it will be to acquire a weight, a name, a concept of a large bank to be able to compete in the local market, and this happened with Banco Real at that time and today, many years later, you see that it happens with the other banks. You do not see a Bradesco [today Brazil's second largest private bank] succeeding to consolidate itself [abroad]. You do not see Banco do Brasil consolidate itself [abroad]. You do not see Itaú-Unibanco [today Latin American's largest private bank] consolidate itself abroad. So this leap from a bank originated in a not yet developed country and to gain a status of a top bank in a developed country, say, in the northern hemisphere, is very difficult, very difficult.” (Ribeiro) Both testimonials suggest that Banco Real was suffering from liability of foreignness. In other words, its existing competitive advantages could not sufficiently offset the relational and discriminatory hazards abroad, due to the high institutional distance between developing and advanced economies (Eden and Miller, 2004). However, we may infer that the difficulty to overcome liability of foreignness seemed to have signaled to the bank's managers already in the 1970s that, beyond its well-defined niche market of trade-related services, international waters were difficult to

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navigate. Thus, high perceived liability of foreignness coexisting with business opportunities and manageable BTDE at home seems to have convinced them to exploit their international presence in the domestic market. Banco Real's approach sharply contrasts with that pursued by banks from advanced economies. Spain's Banco Santander, for instance, also established a branch network in Latin America during the 1970s and 1980s in order to service chiefly corporate customers. However, building on the resulting knowledge of Latin American markets, and once having achieved market leadership in its comparatively small home market after a series of M&As, Santander bought 28 banks for US$ 28 billion, overcame LOF and established itself as a leading retail bank in Latin America and elsewhere (Guillén and Tschoegl, 2000; Guillén and Tschoegl, 2008). 4.5. Internationalization and domestic performance An internationalization strategy that seeks to build a differentiation-based competitive advantage in the domestic market is likely to increase long-term performance. From a resource-based perspective, this argument is clear-cut: if the resources and capabilities that have been created in the course of internationalization are valuable, rare, difficult to imitate and exploitable by the organization, then the firm is likely to have developed a sustained competitive advantage that results in above-average returns (Barney, 2002). As explained in detail above, the probability that this relationship holds is higher if the first three propositions (P1, P2, and P3) hold at the same time. If any of them do not hold, the service firm may still achieve a competitive advantage, though a non-sustainable one. Proposition 5. A service firm in a network industry is more likely to build a sustained competitive advantage in its domestic market if Propositions 1, 2 and 3 hold at the same time. 4.5.1. Banco Real's internationalization and domestic performance Although we cannot measure performance directly, due to unavailable data, several indications obtained through interviews and secondary information suggest that internationalization consistently added to Banco Real's performance in terms of (1) new client acquisition and (2) financial performance. 4.5.1.1. New client acquisition. Several new client acquisitions suggest that the differentiation strategy worked out well. Alcoa, for instance, “was only won over because we could service that client in various countries” (Cunha). Another example is Reynolds: with its regional headquarters in São Paulo, Banco Real could offer credit lines for several South American countries with one stroke and concentrate the client's foreign exchange business. This also worked the other way around: General Motors do Brasil (GMB), for instance, was won over as a client because of Banco Real de Colombia's contacts with General Motors of Colombia. Consequently, the domestic and, subsequently, the international client base increased, reaping economies of scale and projecting the reputation of a solid, credible “South American Bank.” As a result, access to international funding improved, made further expansion of South American trade financing possible and contributed to a stronger performance. 4.5.1.2. Financial performance. As several quotations from our respondents indicate, profitability and liquidity seemed to have been above average. The international branch office network permitted the bank to take advantage of arbitrage opportunities, to protect it from currency crises and to access international funding under more favorable conditions. Banco Real's return on assets improved considerably relative to competitor banks from the second half of the 1970s. Table 3 compares Banco Real's performance data to that of its peer group. When first steps abroad were initiated, Banco Real's performance was clearly below average (11.53% compared to a 1971–1975 mean score for all banks of 15.4%). Comparing the top 20 Brazilian private and state-owned banks (data is available upon request), a relative performance increase is striking: while in 1975 Banco Real's profitability (return on assets) ranked 19th, it ranked 15th in 1977 and 3rd in 1979, only slightly behind Banco Francês e Brasileiro and Citibank. Banco Real's return on assets was the most stable of all selected banks (performance standard deviation of 6.99% against an average of 8.83, see Table 3). However, there is reason to believe that these official performance data underestimate Banco Real's actual performance because “the bank does not publish consolidated balance sheets that include the figures for its foreign affiliates.” The same source informs that the bank's foreign exchange operations strongly increased from December 1979 to June 1981.10 The latter indicates that Banco Real's foreign operations seem to have generated significant new business. Altogether, the abovementioned performance data suggests that the bank's strategy led to a sustained competitive advantage, defined as persistently aboveaverage performance. Likewise, a former country manager (Gonçalves) drew attention to the fact that Banco Real maintained its foreign investments abroad (with the exception of its former African operations), despite several economic crises and without the help of any partner investors. Similarly, a former director from Bamerindus (today HSBC), a competitor bank, stated that the main outcomes of the internationalization process for Banco Real were faster organic growth compared to its main private competitors, an increase of domestic and international foreign trade clients, increased competitiveness in international markets, a strong improvement of its 10 Gazeta Mercantil–Balanço Anual, September 30, 1981, volume 5, number 5, p. 39, São Paulo. The positions with the largest increase are advance money for foreign exchange contracts, + 530%. Foreign currency exchange increased by 256%, and other credits in foreign currency increased by 66%, from December 1979 to June 1981.

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Name

1971

1972

1973

1975

1977

1979

1980

1981

1982

1983

1984

1985

Bamerindus Banco do Brasil Banco Itaú Banco Nacional Banco Real Banespa Bradesco Unibanco Mean

24.68 1.88 14.43 5.84 12.89 10.66 13.19 8.62 11.66

13.96 11.89 10.63 9.96 12.35 18.72 11.88 7.73 13.93

20.00 7.06 13.33 18.32 5.56 14.81 16.84 8.64 16.19

33.76 29.83 42.29 20.84 15.32 19.49 17.51 19.77 28.25

18.05 21.42 17.16 12.19 19.92 24.97 38.83 22.73 21.79

9.91 11.08 11.6 11.18 18.2 7.05 14.2 12.19 12.47

15.47 21.01 18.1 10.2 12.77 8.34 15.92 14.77 15.37

28.14 22.54 30.28 18.78 31.31 9.82 35.42 18.5 24.22

20.86 15.17 18 11.53 14.5 11.92 21.4 14.92 18.61

15.06 14.93 25.03 10.16 17.01 11.13 17.5 14.27 19.21

5.33 14.81 18.52 6.45 7.57 11.78 15.2 11.83 13.56

13.66 18.75 21.5 9.44 11.54 21.88 23.75 13.96 15.85

Name

1986

1987

1988

1989

1990

Mean 1971–90

Mean 1971–75

Mean 1976–80

Mean 1981–85

Mean 1986–90

S.D. 1971–90

S.D. 1971–75

S.D. 1976–80

S.D. 1981–85

S.D. 1986–90

Bamerindus Banco do Brasil Banco Itaú Banco Nacional Banco Real Banespa Bradesco Unibanco Mean

6.35 4.65 16.15 10.52 15.11 20.65 17.24 14.83 12.00

7.85 11.42 15.10 13.04 11.60 27.07 14.33 11.24 13.14

11.70 14.97 11.71 8.83 9.67 24.38 14.47 10.52 11.82

9.93 1.77 18.39 9.32 15.70 31.05 21.62 12.84 14.91

10.76 7.74 13.60 13.53 14.92 20.57 13.53 14.92 11.74

16.35 14.23 19.33 14.94 16.90 19.47 21.19 16.47 17.36

23.10 12.66 20.17 13.74 11.53 15.92 14.85 11.19 15.40

20.08 19.38 20.66 17.03 21.35 18.22 26.67 21.64 20.63

16.61 17.24 22.67 11.27 16.39 13.31 22.65 14.70 16.85

9.32 8.11 14.99 11.05 13.40 24.74 16.24 12.87 13.84

9.91 8.47 9.48 8.06 6.99 9.30 10.89 7.56 8.83

8.35 12.15 14.83 7.02 4.19 4.06 2.75 5.73 7.39

12.12 8.47 12.71 9.59 7.90 12.42 14.43 10.74 11.05

8.51 3.39 5.10 4.59 9.05 4.86 7.87 2.42 5.72

2.18 5.25 2.53 2.14 2.63 4.46 3.32 2.01 3.07

S.D. means standard deviation.

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Table 3 Performance data (RoA) of the main private commercial banks in terms of deposits. Visão–Quem é quem na economia brasileira (magazine); the annual editions for 1974, 1976 and 1978 are missing.

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image both domestically and internationally and, finally, increased attractiveness as a takeover target (which culminated in the acquisition of Banco Real by ABN Amro in 1998). 5. Discussion and conclusions 5.1. Summary and implications This study has proposed a conceptual model that explains under what conditions internationalizing service firms in network industries tend to exploit their respective international networks in their domestic markets. Drawing on the VRIO framework (Barney, 2002), an internationalizing service firm is likely to exploit its international presence and related R&Cs in its domestic market given that its R&Cs are insufficient to overcome LOF but sufficient to compensate for barriers to domestic expansion (BTDE) at the same time (Proposition 4). These R&Cs are valuable when the focal firm's international network helps to provide services for its domestic clients that help it to add value (e.g., by access to financial and information resources) or to reduce costs (e.g., by skillful intermediation [Proposition 1]). The rarity condition holds when the R&Cs are scarce compared to domestic demand. This may occur when domestic competitors in the same market segment are not yet or less internationalized (Proposition 2) or when foreign competitors are not equally widely present in its domestic market. In this situation, the imitation of such a strategy is difficult because setting up a domestic or an international network takes time and involves a series of interconnected and causally ambiguous activities. The ability to exploit the international network by the domestic service organization depends on the strength of the existing domestic presence and the domestic market size (Proposition 3). Thus, this paper explains how (VRIO framework), why and under what conditions (the four propositions) service firms may exploit their respective international affiliate networks for a domestic market differentiation strategy. Moreover, the paper proposes that such a strategy leads to a sustained competitive advantage when several of the mentioned conditions hold at the same time (Proposition 5). This study makes two major theoretical contributions. First, it develops, for the first time, a conceptual model that explains why and under what conditions service firms may exploit their respective international affiliate networks at home. Thus, this study extends literature on difficulties in internationalization (e.g., Cuervo-Cazurra et al., 2007; Madhok, 2010) by filling an important research void of a thus far disregarded intermediate strategy (“exploiting the liability of foreignness”) between successful internationalization and de-internationalization. Second, this study contributes to literature on multinational corporations by extending the network view in international business. We build on Ghoshal & Bartlett (1990), who conceptualized the MNC as an interorganizational network. Whereas previous research primarily focused on external linkages or network embeddedness (e.g., Ghoshal & Bartlett, 1990; Andersson, Forsgren & Holm, 2002), anticipating the concept of external network resources (Lavie, 2006), on external network building as an integral part of an internationalization strategy (e.g., Chen, 2003; Johanson and Vahlne, 2009) or on intra-firm network coordination issues (e.g., O'Donnell, 2000), our concern is with the development of resources and capabilities through the interaction among intra-firm network nodes and their subsequent domestic exploitation. This issue is novel to international business research because it inverts the predominant logic present in the network view in two respects: from an extra-firm (clients or other stakeholders) to an intra-firm (affiliate network) emphasis and from an international to a domestic market focus. These insights are also important to international business because they complement extant research on the relationship between internationalization of service firms (Contractor et al., 2007) and performance. Whereas previous studies have addressed internationalization benefits derived from access to foreign markets, assets, learning opportunities and resources, as well as from arbitrage and efficiency gains, this study adds that internationalization benefits may be derived from the size of the intra-firm network in general, as well as from the number and nature of interactions among intra-firm network nodes in particular, because such interactions generate business opportunities as well as financial and other resources. The paper also makes an empirical contribution by providing the first account of internationalization by an emerging economy's bank. This is especially noteworthy given that the extant literature has focused on advanced countries' bank internationalization (e.g., Guillén and Tschoegl, 2000). Finally, the paper is important because it has helped us to analyze a situation characterized by excessive liability of foreignness, which is probably more frequent when dealing with the former as opposed to the latter kind of firms. 5.2. Future research and generalizability We would like to encourage other researchers to submit our propositions to empirical tests in other large emerging economies, such as Russia, India, China or African countries, where the strategic choice of exploiting internationally sourced R&Cs domestically (choice II in Fig. 1) is likely to be detected. Due to large domestic markets and only recent market opening, incentives for internationalization have probably been much lower, and incentives to spread out in domestic markets much higher, than in smaller, open and advanced economies. Therefore, situations described in Propositions 2 and 3 are likely to occur, and BTDE is less likely to be a severe obstacle. Second, as argued in Section 4.4, LOF is probably an important concern for service firms from other developing and emerging economies as well. Although this study has developed arguments on specific types of LOF and BTDE, we believe that several other types may be found in different contexts. Qualitative follow-up research in different countries and different service industries may help to develop a finer grained conceptualization of both variables. Moreover, we recognize that there may be other important aspects

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related to the general problem of going abroad to strengthen the domestic competitive advantage. Future research should address such aspects in different industries. Another issue for empirical and conceptual studies would be to develop the reasoning behind higher-order moderator effects and to test them. Different combinations of domestic and foreign-market-related variables may enhance or reduce the likelihood of exploiting an international network and associated R&Cs in the domestic market. Acknowledgements I gratefully acknowledge the excellent feedback of the three anonymous reviewers and the editor. I am also indebted to the interviewees who shared their experiences, especially to Sebastião da Cunha, who made this research possible. Finally, I would like to thank the publisher Banas, FEBRABAN and my colleague Antonio Sanvicente who made their archives available. References Andersson, U., Forsgren, M., Holm, U., 2002. 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