Conformity or nonconformity in multinationality? Performance implications for the Italian ceramic tile manufacturers.

VerfasserGiachetti, Claudio
PostenRESEARCH ARTICLE - Report - Abstract

Abstract To date international management studies have found mixed results on the relationship between multinationality and performance. We address the multi-nationality-performance relationship by exploring the concept of conformity in multinationality, which expresses the extent to which a firm's multinationality resembles the multinationality of its peers at a particular point in time. Our results show that, ceteris paribus, the best performing firms are those with high levels of conformity in multinationality to the strategic group peers as well as those with high levels of conformity to the market leader. Hypotheses are tested with data on the conformity in multinationality of 61 Italian ceramic tile manufacturers in the 2005-2009 time period.

Keywords Conformity [??] Multinationality [??] Performance [??] Reference target [??] Ceramic tile industry

1 Introduction

During the last few decades, globalization has changed the structure of several industries. It has lowered barriers across countries, conferring significant benefits to firms, but also bringing about costs. Such benefits and costs may significantly influence firms' ability to achieve a competitive advantage. Therefore, decisions concerning multinationality have become increasingly important for firms' survival and success. Multinationality is a construct regarding the expansion beyond the firm's home country and, particularly, where, how, and the extent to which the firm expands abroad (Hennart 2011; Sullivan 1994): 'where' refers to location choices (e.g., Mudambi 2008), 'how' to mode of entry (e.g., Brouthers 2002), and the 'extent' to the degree of multinationality, which involves foreign market penetration, foreign production presence, country scope, and the degree of diversity of the foreign countries in which a firm operates (e.g., Sullivan 1994; Tallman and Li 1996).

Many studies in international management have addressed the issue of whether and how the degree of multinationality influences firm performance. To date, because of the wide spectrum of results that have emerged in the empirical literature, no general consensus about the multinationality--performance relationship has been reached by scholars (Hennart 2011; Hitt et al. 2006; Kirca et al. 2011; Marano et al. 2016). For example, some researchers have found support for a positive linear relationship between multinationality and performance (e.g., Kim and Lyn 1986), others for a U-shaped or inverted U-shaped relationship (e.g., Hitt et al. 1997; Lu and Beamish 2001; Yang and Driffield 2012), and still others for a sigmoid relationship (e.g., Contractor et al. 2003; Lu and Beamish 2004). Finally, there are also authors who have found no significant relationship (e.g., Tallman and Li 1996).

Taking into account such mixed results, scholars propose going beyond the mere relationship between the degree of multinationality in and of itself and performance (Hennart 2011). Relatedly, scholars point out that the literature on antecedents of multinational enterprise (MNE) performance is currently dominated by traditional multinationality-performance research and, therefore, urge to examine overlooked determinants at the industry, country, and firm levels of analysis (Matysiak and Bausch 2012). For example, an observed improvement or worsening in performance may not be driven by changes in the firm's degree of multinationality, but rather by the way in which the firm internationalizes per se and in comparison with its peers (Hennart 2011; Wiersema and Bowen 2011).

Considering such calls from international management scholars, in this paper we adopt a different perspective on the multinationality--performance relationship. Whereas prior research on the multinationality--performance relationship has focused on the choices of the individual firm in order to understand whether a higher degree of multinationality either benefits or damages profitability (see Hitt et al. 2006 for a comprehensive review), we attempt to shed new light on such relationship by adopting an inter-organizational perspective. Specifically, we aim to explore whether and how a firm's conformity or nonconformity in multinationality influences its profitability.

Several studies show that the extent to which firms conform to their peers significantly affects performance, usually measured in terms of profitability and survival rates. These studies analyze the impact of (non)conformity on performance with regard to such variables as institutional embeddedness (e.g., Baum and Oliver 1991), resource requirements (e.g., Baum and Mezias 1992), resource endowments (e.g., Barney 1991), value chain configurations (e.g., Porter 1985), competitive moves (e.g., Chen and Hambrick 1995; Miller and Chen 1996), strategic orientation (e.g., Gimeno and Woo 1996), adoption of innovations and new product introduction (e.g., Lee et al. 2000), and asset allocation (e.g., Deephouse 1999). However, less is understood about the performance implications of (non)conformity in multinationality. As shown in Table 1, conformity in multinationality has been explored in previous international management research. For example, studies building on information- and rivalry-based theories of imitation (Lieberman and Asaba 2006) show that home-country institutional and competitive factors influence the propensity of a firm to imitate the foreign entry decisions of rivals (Delios et al. 2008; Fabian et al. 2009; Francis et al. 2009; Li and Yao 2010; Xia 2010; Yang and Hyland 2012). Despite that, only a few studies have examined the performance implications of (non)conformity in multinationality (e.g., Brouthers et al. 2005; Fernhaber and Li 2010; Gielens and Dekimpe 2007). Such examination is relevant, on the one hand, for theory, since a fundamental issue in strategy is what determines success or failure in international competition (Rumelt et al. 1994), and, on the other hand, for practice, as decisions concerning international expansion are increasingly more important for the survival and success of firms of all sizes. As recently observed by some authors, "there is a strong need for future research to more thoroughly examine the relationship between the imitation of internationalization modes and the subsequent performance outcomes" (Oehme and Bort 2015, p. 651). Also, while in most studies the 'object' of the imitation process (i.e., 'what' is imitated) is the entry mode chosen by a firm's home-country rivals, no studies, to the best of our knowledge, have focused on conformity in terms of the other dimensions of the multinationality construct, i.e. the extent of expansion abroad and where to expand. For example, in the context of new venture internationalization, Fernhaber and Li (2010) point out the following unanswered question: "Is the percentage of foreign sales ultimately achieved by the new venture a result of imitation and, if so, what is the impact on performance?" (Fernhaber and Li 2010, p. 25).

We define conformity in multinationality as a firm-level construct, expressing the extent to which a firm's multinationality resembles the multinationality of its peers at a particular point in time. It is worth noting that we limit our arguments to conformity that is deliberate, i.e. intentionally pursued by firm (Barnard 1938; Penrose 1959), and specifically concerns multinationality decisions. While conformity in multinationality may also be affected by (a) firm characteristics (such as size and age), (b) conformity in other strategic actions (e.g., product diversification and vertical integration), (c) responses to exogenous environmental dynamics, (d) or simply chance, in our empirical analyses we attempt to capture only the deliberate conformity in multinationality.

Our definition of the construct implies that conformity in multinationality differs depending upon which peers are used as a reference target. In this study, we focus on two reference targets previously studied in strategy research, namely, the strategic group (Fiegenbaum and Thomas 1995) and the market leader (Giachetti and Dagnino 2017; Giachetti and Lanzolla 2016), and argue that conformity in multinationality affects firm performance through multiple mechanisms that are theoretically related to the two aforementioned reference targets. Moreover, we posit that some of those mechanisms, i.e. uncertainty reduction, competitive risk reduction, and mitigation of rivalry, operate when conformity is high, while others, i.e. exploitation of a distinct international allocation of resources, operate when conformity is low. Based on that, we develop and test two sets of hypotheses concerning the effect of conformity in multinationality on financial performance. Each set includes two hypotheses, one for each reference target (i.e., strategic group and market leader). Because of the different mechanisms potentially at play, the first set of hypotheses posits that conforming to the international posture of the strategic group peers or that of the market leader results in positive performance implications, while the second set of hypotheses posits the opposite, i.e. conformity has a negative effect on firm performance. We test our competing hypotheses using panel data on 61 Italian ceramic tile manufacturers and find that, ceteris paribus, the best performing firms are those with high levels of conformity in multinationality to the strategic group peers as well as those with high levels of conformity in multinationality to the market leader. These results suggest that, when expanding abroad, firms attaining uncertainty reduction, or competitive risk reduction and mitigation of rivalry through conformity in multinationality tend to outperform those pursuing exploitation of a distinct international allocation of resources.

This study contributes, on the one hand, to the international management literature, and, on the other hand, to research on (non)conformity. First, while studies in...

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