Theoretical mechanisms for the role of home market concentrations in driving firm outperformances : evidence from Chinese listed real estate firms

Abstract

During a period of economic downturn or industry tightening, firms face difficult circumstances and may have to make strategic decisions regarding the geographic scope of business operations. These decisions are critical to exploit entrepreneurial opportunities on a provincial or national scale for firms to survive and remain competitive. However, there is not having reached to a consensus on whether should pick geographical diversification strategy or local concentration strategy so far. Based on the Resource Based Theory and Market Power Theory, firms that diversify their business geographically exploit existing resources in different geographic segments and achieve greater market power to enhance their profitability. On the other hand, drawing on the Institutional Theory and Information Asymmetry Theory, firms benefit from local information advantage and institute influence by conducting business in their home markets. Moreover, in recent years, a lot of studies have found these home market concentrations are becoming more and more common and pronounced. This thesis also observes a significant high concentration on the home market and aims to further investigate the theoretical mechanisms underlying how the home market concentration enhances firm performance. Collecting 533 firm-year panel data of Chinese listed real estate firms from 2016 to 2023 and using 45,601 granular project level data, this study documents a significant high concentration of real estate development projects on home province, where the firm is headquartered. We further define provinces bordering on the home province as neighbor provinces, the whole home province and its neighbor provinces as related provinces. We identify there is a significant positive relationship between firm outperformance and home province concentration and related provinces concentration, but not for neighbor provinces concentration. Then, through home province’s economic performance and the firm’s enterprise identity, we find that the theoretical mechanisms are different between state-owned enterprises (SOEs) and non-SOEs. These non-SOEs with high home concentration take information advantages to get outperformance. But when it comes to SOEs, they exert the institutional influence to perform better. By further dividing SOEs to Central-SOEs and Local-SOEs, this study robustly identifies the institutional influence mechanism channel. With constructing another concentration proxy, which measures the highest province concentration excluding the home province, we identify the outperformance associated with home province concentration is not due to a risk-based channel. Besides that, this study also considers potential endogeneity concerns arising from reverse causality and omitted variables, and the results remain consistent. Additionally, the results are still robust after employing several alternative variables to measure firm performance and the home province concentration.