Location Choice and the Firm Performance in Developing Countries: The Exploration-Exploitation Perspective

Abstract

Location choice has been one of the key elements to affect the performance of firms. While existing literature highlights the strategic value of agglomeration, we question whether the value also applies in the context of developing economies, considering the weak institutional environment would hamper the overall benefit of clusters. Based on the exploitation-exploration framework proposed by March (1991), this study posits that the exploration-oriented locations provide more opportunities for firms operating in developing countries. Reflecting the characteristics of developing countries that state intervention is common and strong, we hypothesize that the state ownership, opposite to the venturing spirit, flexibility, and agility on the private businesses, weakens the strategic fit with the exploration-oriented location choices. Using a dataset of Vietnamese firms listed in the Ho Chi Minh Stock Exchange, our statistical findings show that firms’ level of exploration orientation would have a positive effect on firm performance. Additionally, the level of state ownership would weaken the effect of exploration-oriented location choice on the performance. Overall, this study suggests that exploration-oriented locations may be the optimal choice for firms who would seek profitability and achieve competitive advantage in developing countries. At the same time, state ownership may prevent firms from efficiently utilizing the accessible resource in those locations.