Multinationality and Technical Efficiency: A Neglected Perspective

Zusammenfassung

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This paper addresses production function and technical efficiency in the context of multinational enterprises (MNEs). It applies the stochastic frontier production function technique (SFPF) to investigating a sample of US manufacturing MNEs and finds that an MNE normally encounters two phases of "liability of internationalization" in the course of international expansion. In addition, it shows that the firms with intensive investment in R&D and advertising development tend to alleviate or even avoid the "liability of internationalization" and enjoy a prolonged period of effective international expansion. The relationship between multinationality and meta production frontier (as well as technical efficiency) exhibits an upward horizontal S-curved relationship. R&D and advertising intensity (RDAI) positively affects the relationship between multinationality and meta production frontier (as well as technical efficiency). In the case of very high RDAI, the S-curve transforms itself into an upward monotonous curve.

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Multinationality and Technical Efficiency: A Neglected Perspective

Introduction

International business scholars have elaborated on numerous benefits and costs for multinational enterprises (MNEs) along the path of internationalization. In doing so, they have tried to predict the net impact of multinationality on firm performance which is often measured in terms of return on assets (ROA), return on sales (ROS), Tobin's q, etc. (Contractor/Kundu/Hsu 2003, Li 2005, Lu/Beamish 2004, Ruigrok/Wagner 2003, Thomas/ Eden 2004). Research on technical efficiency of MNEs has largely been neglected. Technical efficiency is defined as producing the maximal level of output given inputs (Cornwell/ Schmidt 1996). The maximal output is determined by a (frontier) production function. The discrepancy between actual and maximal outputs for a given set of inputs reflects technical inefficiency or X-inefficiency (Leibenstein 1969), indicating the existence of organizational slack resources (Nohria/Ghoshal 1997).

The lack of attention to technical efficiency of MNEs perhaps exists for good reasons. First, MNEs utilize complex and often diversified production systems, adopt a variety of technologies, and operate in geographically dispersed territories. Conventionally, it makes little sense to talk about MNE technical efficiency because it is hard to define a frontier production function. Second, international business scholars have not typically availed themselves of the research methods utilized by economists to study firm technical efficiency. Third, in recent years, scholars and practitioners have appeared to emphasize strategic rationale of MNE activities, and downplay the role of efficiency in the use of resources which is a fundamental inquiry in microeconomics. Indeed, Doz commented: "Both the fields of strategic management and [international business] have moved away from their flirtations with microeconomics ..." (1997, p. 497)

I argue that achieving technical efficiency is a fundamental issue for MNEs. The popularity of the management practices such as total quality management, concurrent engineering, and just-in-time logistics indicates that MNEs really need to minimize slack resources and be efficient in managing a wide range of inputs, technologies, and business processes (Nohria/Ghoshal 1997).

The purpose of this pape...

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