Chinese Service Multinationals: The Degree of Internationalization and Performance.

VerfasserWei, Ziyi

1 Introduction

Research on the relationship between the degree of internationalization, also known as the degree of multinationality, and performance (M-P) has received significant attention from academic scholars in international management for the past 3 decades. However, despite the substantial body of empirical attempts, statistical findings continue providing inconclusive results. These include positive (Rugman et al. 2008), negative (Denis et al. 2002), and nonsignificant linear effects (Tallman and Li 1996), and wide variations in types of curvilinear, such as U-curve (Xiao et al. 2019), S-curve (Lu and Beamish 2004) and inverted S-curve relationships (Chiang and Yu 2005) (for a comprehensive review, see Nguyen 2017; Nguyen and Kim 2020). Until now, the dominant approaches to explain these divergent results have been either methodological refinement, such as the selection of different multinationality and performance measures, or the incorporation of different sets of moderators that capture firm-, country- and industryspecific characteristics (Geleilate et al. 2016; Kirca et al. 2011, 2016; Shin et al. 2017).

However, Hennart (2007) and Rugman and Verbeke (2008a) among others have criticized the present trend of continuously bringing complex statistical models to the literature. They suggest that the mixed empirical findings are due to the lack of theoretical support for the existence of a universal M-P relationship. Instead, these studies argue that from the perspective of internalization theory, the fundamental reasons for any linkage (might be) observed for the M-P relationship are an MNE's firm-specific advantages (FSAs) (Hennart 2011; Nguyen 2017; Nguyen and Kim 2020; Rugman and Verbeke 2008a; Verbeke and Brugman 2009). Among them, Verbeke and Forootan (2012) propose one framework arguing that it is FSAs that determine an MNE's scope of international expansion, as well as its domestic and international performance success. Without the possession of firm resources and capabilities, foreign expansion does not by itself deliver superior financial performance.

"Classic" internalization theory primarily focuses on MNEs' knowledgebased FSAs typically in the form of asset-type FSAs, such as upstream patented technology and the downstream brand names, and transaction-type FSAs, such as managerial capabilities and coordination skills. An MNE must possess these internationally transferrable or non-location bound (NLB) FSAs over indigenous firms in the host country that outweigh the costs of doing business abroad (Buckley and Casson 1976; Rugman 1981). Meanwhile, "new" internalization theory, proposed by Rugman and Verbeke (1992, 2001, 2003) extend "classic" internalization theory by introducing the concept of location bound (LB) versus NLB FSAs and emphasizing the importance of the resource recombination capabilities that drive MNE success in host countries. An MNE needs to leverage host country-specific advantages (host CSAs) and develop LB FSAs, such as local reputation and network, for national responsiveness. Accordingly, an MNE makes dual use of CSAs from home and host countries, and appropriate recombination of existing NLB FSAs with newly created LB FSAs. Overall, an MNE's financial performance depends critically on the strengths of its conventional FSAs (assettype and transaction-type), and its resource recombination capabilities leading to the development of new FSAs to adapt to environmental changes (Verbeke and Brugman 2009; Verbeke and Forootan 2012).

In the light of critiques of the literature on M-P relationship, our purpose is not to test a direct M-P relationship (with or without moderators) statistically as this stream of literature suffers from severe theoretical flaws (Hennart 2011; Verbeke and Brugman 2009; Verbeke and Forootan 2012). Rather, by drawing upon Verbeke and Forootan (2012)'s framework, we analyse the degree of multinationality measured by foreign sales over total sales and the financial performance of Chinese service firms relative to global peers using the benchmarking method with industry financial data. Specifically, we investigate the 500 largest Chinese service firms and identify the number of these service firms to be true MNEs by Rugman (1981)'s definition. According to Rugman (1981), an MNE is a firm headquartered in one country with operations in other countries, having the ratio of foreign sales over total sales ([F/S.sub.sales]) of minimum 10% and at least three foreign subsidiaries (the threshold of 10% in foreign sales ratio comes from the international financial reporting standard IFRS 8, Operating segment). Our study attempts to address the following research questions:

  1. To what extent are the largest 500 Chinese service firms to be true MNEs by a definition of Rugman (1981)?

  2. How is the financial performance of Chinese service MNEs relative to their global peers operating in the same industries?

We selected Chinese service sector because service firms' internationalization is particularly relevant to the on-going debate--whether it is FSAs or multinationality to be the prerequisite for firm performance. This is because Chinese MNEs' FSAs are built upon home country government support (a type of home CSAs) by providing favourable policies, investment information, and low-cost capital that enables them to embark on internationalization (Ramamurti and Hillemann 2018; Wei and Nguyen 2017). It is particularly true for Chinese service firms, given that Chinese service industries are dominated by state owned enterprises (SOEs) (Breslin 2012; OECD 2015). They use artificially cheap debt capital to finance internationalization which is in line with the "go global" policy and "the Road and Belt Initiative" of the Chinese government (Meyer 2018; Rugman et al. 2014, 2016). As such, Chinese service firms may start international expansion and increase the degree of multinatinality while possessing little or no conventional FSAs in technology and brand reputation. More importantly, we compare the financial performance of Chinese service firms to be true MNEs with more than 10% foreign sales to their global counterparts operating in the same industry. This allows us to investigate to what extent being multinatinality pioneers while lacking valuable firm resources enable firm to perform competitively in the context of Chinese service sector. Overall, these two research questions are inextricably linked to Verbeke and Forootan (2012)'s framework that focuses on the relationship among FSAs, multinatinality and financial performance.

To answer these questions, we elaborate on three important academic streams: the literature on the M-P relationship, on service sector internationalization and on Chinese service MNEs. Our study makes three specific contributions to the literature. First, we contribute to the M-P relationship literature by unbundling the unique sets of FSAs owned by Chinese service firms. On the one hand, most of the extant research on the M-P relationship focusing on advanced economy MNEs have assumed the resource allocation commitments to international expansion. This actually creates endogeneity problem that any effect of an MNE's multinationality on performance might be explained by its internal strengths and weaknesses given that firms with strong FSAs are more likely to be internationally oriented (Verbeke and Brugman 2009).

On the other hand, Chinese service MNEs shed new lights on the current M-P relationship debate as the type of FSAs which they possess are location-bound and heavily relied on home CSAs of the government support for SOEs and large domestic market size (Rugman et al. 2014, 2016). Their FSAs are stand-alone FSAs through recombination with home CSAs, which are neither exploitable nor sustainable in foreign markets. We demonstrate that overall Chinese service firms have very limited degree of multinationality as the majority of them are purely domestic firms with no foreign sales. Even among a few true Chinese service MNEs, they perform poorly relative to global counterparts operating in the same industries, regardless of their degree of multinationality. As such, we confirm the theoretical validity of Verbeke and Forootan (2012)'s framework that denies any linkage between multinationality and performance without the existence of knowledge-based FSAs constituting a necessary condition for foreign investment.

Second, our study contributes to "new" internalization theory by contextualizing its application to Chinese service MNEs with a specific focus on FSAs as a key determinant of both internationalization and performance. We draw upon "new" internalization theory as it introduces and highlights the concept of LB FSA referring to the firm strengths deployable and exploitable in a limited geographic area-either home country or host county bound. On the one hand, Rugman et al. (2016) argue that these government-created advantages of Chinese firms, such as state ownership and large domestic market size, are a type of stand-alone FSAs (Verbeke 2013) and are home country-bound. On the other hand, service sector is different from manufacturing sector in numerous features, such as the intangibility of offerings, and the inseparability and perishability of the production and consumption process (Buckley et al. 1992; Meyer et al. 2015). Such features require the FSAs of service MNEs to be host market-specific and locally embedded, or host country-bound that represent disincentives to improve performance (Xiao et al. 2019). In this study, we find that it is often challenging for Chinese service firms to develop new LB FSAs in host countries, which are essential to achieve foreign sales and superior performance in overseas operations. As such, "new" internalization theory is particularly valid in explaining our findings.

Third, we contribute to the literature on the internationalization of Chinese service firms which has been scarcely...

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