The Theoretical Rationale for a Multinationality-Performance Relationship

Zusammenfassung

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This paper reviews the theoretical rationale that has been advanced so far for a positive relationship between multinationality (ie international diversification) and performance. The researchers show that transaction cost/internalization theory implies no direct and general relationship between international diversification and performance. For example, it is quite possible that the assumptions made by TCI theories that an MNE's level of international diversification cannot remain suboptimal for long are too strong, and that systematic biases may cause more permanent deviations from the optimum level of international diversification. Hence managers with strong ethnocentric views may systematically under-invest abroad while excessive international diversification, on the other hand, may result from managerial preference for empire building, as argued by Click and Harrison. These propositions could be tested by investigating how the experience of top managers or the incentives they face influence their firm's international diversification and its performance.

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Auszug

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The Theoretical Rationale for a Multinationality-Performance Relationship

Introduction

A flourishing empirical literature has, in the last ten years, attempted to find out whether a firm's multinationality, M, (i.e. its international diversification - the extent to which it undertakes value-adding activities in many different foreign markets) affects its performance (P).1 More than 100 empirical studies have investigated this relationship, many of them published in top ranked journals such as Management International Review, the Journal of International Business Studies, the Academy of Management Journal, the Journal of Finance, and the Strategic Management Journal (Liu 2004). These studies have used a diversity of theoretical approaches, from the finance theory of portfolio diversification (e.g. Kim/Hwang/ Burgers 1993, Reeb/Kwok/Baek 1998), to the resource-base view (e.g. Kotabe/ Srinivasan/Aulakh 2002), and to organizational learning theory (e.g. Ruigrok/ Wagner 2003), to predict a generally positive and monotonie (but in more recent studies a U-shaped or sigmoid) relationship between multinationality and performance. As many authors have noted (e.g. Ruigrok/Wagner 2003, Hitt/Hoskisson/ Kim 1997), the findings of this literature have been disappointing. In spite of the very large number of studies, they have not been robust, as the relationship between M and P has been found to be negative (e.g. Denis et al. 2002, Click/Harrison 2000), insignificant or very weak (e.g. Tallman/Li 1996, Bodnar/Tang/Weintrop 2003), positive (e.g. Kim/Lyn 1986), U-shaped (e.g. Ruigrok/Wagner 2003), inverted U-shaped (e.g. Gomes/Ramaswamy 1999), and sigmoid (e.g. Contractor/Kundu/ Hsu 2003, Lu/Beamish 2004).

What accounts for these unconvincing results? With few exceptions (e.g. Dess/ Gupta/Hennart/Hill 1995, Goerzen/Beamish 2003, Li/Goerzen/Verbeke 2005), the search for explanations has not delved on possible weaknesses in theoretical underpinnings, concentrating instead on how to measure M and P and on the specific form of the relationship (linear or non-linear, and if non-linear, two stages or three stages) (Annavarjula/Beldona 2000, Contractor/Kundu/Hsu 2003, Sullivan 1994).

It is not my goal here to do a comprehensive review of this vast literature, or, following most authors, to discuss in detail which operationalization of M and P should be chosen. Given the lack of robust empirical findings after more than one hundred investigations, the time seems ripe for a re-evaluation of the theoretical bases of this literature. The goal of this paper is, therefore, to critically evaluate the theoretical arguments offered in the M/P literature for the existence of a relationship between M and P.

The first section of this paper summarizes the main theoretical arguments made by the M/P literature for the existence of such a relationship. As a background for a critical evaluation of these arguments, Section 2 succinctly summarizes some salient facts about MNEs and foreign direct investment (FDI), and briefly sketches one the main theories which have been developed to explain them, the transaction cost/internalization (TCI) model. Based on this rapid summary of TCI and of what we know about MNEs, Section 3 presents a critical evaluation of the theoretical arguments of the M/P literature and argues that there is no strong theoretical support for the existence of a universal and positive relationship between M and P. I follow with a short discussion of methodological issues, before offering some conclusions. The Main Arguments of the M/P Literature The M/P literature has made two main predictions. Fi...

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