The authors acknowledge financial support from REL Consultants (INSEAD), Belgian Prime Minister's Fund for Scientific Research and Solvay Doctoral Fellowship. We thank Martina Vandebroek and Tom Vinaimont for suggestions on statistics issues. We also thank Piet Sercu for comments on an earlier draft. AbstractIn this study we revisit the question of whether firms' performance (usually measured as return on assets or ROA) is driven primarily by industry-or firm-specific factors by extending past studies in two major ways. First, we examine if the findings of past research can be generalized across all firms in an industry or whether it depends on a particular class of firms within the same industry. Second, in a departure from past research, we use value-based measures of performance (economic profit or residual income and market-to-book value) instead of accounting ratios. We also use a new data set and a different statistical approach for testing the significance of the independent effects. Our study uncovers an important phenomenon that may in large part be responsible for the strong firm-effect reported in past studies. We show that a significant proportion of the absolute estimates of the variance of finn-specific factors in our study is due to the presence of a few exceptional firms in an industry: the two firms that outperform their industry and the two that underperform in comparison to the rest. In other words, only for a few dominant value creators (leaders) and destroyers (losers) do firm-specific assets matter more than industry factors. For most firms, i.e. for those that are not notable leaders or losers in their industry, the industry effect turns out to be more important for performance than firm-specific factors. A possible explanation of this phenomenon is that superior (or poor) management leads to superior (or poor) firm performance irrespective of industry structure, which matters only for firms "stuck in the middle", i.e. for firms with average managerial capabilities and performance. We also show that this phenomenon does not depend on the metrics used to measure 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 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, i.e. risk adjusted and cash-flow based, measures of firm performance. The results indicate that the importance of country factors is low and firm-specific factors dominate performance across and within countries. The results also show that global industry effects are increasingly more important than country effects.

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