The importance of firm level multinationality in the country versus industry debate

We conduct the most comprehensive empirical analysis that exists to date of the effect multinationality has on the explanatory power of country and industry factors in international diversification. We investigate the impact the size, scope, and location of a company's international sales has on country versus industry factors, analysing 1,276 firms from Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Spain, the UK, and the US over the 15-year period, 1998-2012. We find that the magnitude of the country factor is greater than the magnitude of the industry factor for the period as a whole but that a company's level of international sales has a greater impact on the magnitude of its industry factor than the magnitude of its country factor. Counter-intuitively, we find stocks with lower sales exposure to their country of origin have a higher country factor, and we show the existence of both a strong local and international industry factor. Our results suggest country-of-origin diversification may no longer be sufficient to exploit country-specific risk and the country factor has become a country classification factor.