Economies of Scale: The Rationale Behind the Multinationality-Performance Enigma.
| Verfasser | Eckert, Stefan |
| Posten | RESEARCH ARTICLE |
1 Introduction
The question of whether and how multinationality (M) influences the performance (P) of a firm is a topic of vivid discussion in International Business (IB) (e.g., Contractor, 2012; Hennart, 2011; Kirca et al., 2012; Marano et al., 2016; Pisani et al., 2020). Academic scholars have developed many theoretical arguments to explain the conditions under which multinationality might be beneficial or detrimental to firm performance, ranging from the internalization of intangible assets (Morck & Yeung, 1991, 1992) to the flexibility advantages of a geographically dispersed network of activities (Pantzalis, 2001) to the liabilities of operating in an alien environment (Zaheer, 1995; Zaheer & Mosakowski, 1997). Empirical contributions examining the M-P relationship have provided a wide range of outcomes that are not always consistent. Whereas some scholars claim to have discovered a linear-positive impact of multinationality on performance, others suggest that the impact is linear-negative (Click & Harrison, 2000; Kotabe et al., 2002). In attempts to reconcile these divergent views, some scholars combined certain theoretical arguments in order to develop non-linear performance functions (Contractor et al., 2003; Lu & Beamish, 2004; Ruigrok et al., 2007). Unfortunately, again contradictory findings emerged (Capar & Kotabe, 2003; Lu & Beamish, 2004; Oesterle & Richta, 2013). The variety of empirical outcomes concerning the relationship between multinationality and performance appears to be confusing. Overall, previous findings seem far from robust; they are characterized as inconsistent or even contradictory (Hennart, 2007, 2011; Nguyen, 2016).
In view of these findings, Hennart (2007) challenges conventional M-P research in a widely noticed contribution in Management International Review (MIR) by arguing that the positive effects of multinationality on performance stated in the literature, for the most part, appear to be questionable or at least cannot be expected to occur generally. One exception regarding this is the performance effect of economies of scale. However, Hennart (2007) argues with regard to the economies of scale-argumentation that multinationality only plays an indirect role as it is one channel that provides opportunities to realize economies of scale. These possibilities to expand beyond the national borders in order to reap economies of scale may be necessary for firms from small countries, whereas they may be less or even not at all necessary for firms with a large home market.
With regard to the relevance of economies of scale for the performance impact of multinationality much attention has been given to the role of intangible assets. Intangible assets are firm-specific resources that behave as public goods, i.e., in theory, the marginal costs of their exploitation abroad tend to be zero (Buckley & Casson, 1976). Prominent theoretical reasoning in the literature, which is often related to internalization theory (Morck and Young, 1991, 1992; Kirca et al., 2011) and the imperfect competition theory (Hymer, 1976) maintains that the performance impact of multinationality depends on the amount of intangibles that a firm possesses (Kirca et al., 2011). In his MIR contribution, Hennart (2007) highlights the subtle distinctions concerning the role of intangible assets from the viewpoint of transaction cost theory (TCT) and the imperfect competition theory (IMT). According to Hymer (1976), intangible assets constitute competitive advantages in final output markets and enable the generation of super-normal profits. Hennart (2007), in contrast, following TCT, views intangible assets as firm resources that are--in many cases--most efficiently exploited through internalization due to inefficiencies in intermediate markets. However, these specific governance structures (internalization of intermediate input markets) do not necessarily enable a firm to generate super-normal profits.
This paper aims to clarify the role of scale with regard to the M-P relationship and examine the impact of intangible assets on the interplay between multinationality, scale, and performance. Based on a sample of multinational firms from Canada, Germany, Japan, the UK and the US, we compare the direct impact of M on P vs the indirect impact, i.e., we analyze the empirical relevance of the mediating effect of scale concerning the relationship between multinationality and performance. Furthermore, we analyze the role of intangible assets in the interplay of multinationality, scale and performance. Our paper can be considered a significant contribution to the ongoing academic debate on the relationship between multinationality and performance. Up to now, there are only very few academic studies that have explicitly addressed the effect of economies of scale on the M-P relationship (Abdi & Aulakh, 2018; Fisch & Zschoche, 2011; Richter, 2014). Our study can therefore be considered to be one of the few studies so far to explicitly test the relevance of scale concerning the performance impact of multinationality. Moreover, we contribute to the academic debate by providing a comparison between the indirect effect of multinationality on performance via the economies of scale channel versus the direct effect of multinationality on performance. Furthermore, our study is one of the few research contributions to shed light on the role of intangible assets with regard to the interplay of multinationality, scale, and performance. Our paper is organized as follows. In the next section, we will give a brief overview of the theoretical background and extant research and develop our hypotheses. After that, we will present our methodology. The empirical results are presented and discussed in light of previous research. The paper closes with a view on limitations and implications of our results for managerial practice and future research.
2 Theoretical Considerations
2.1 The Performance Impact of Multinationality in the Academic Discussion
With regard to the performance impact of multinationality, different theoretical arguments are proposed in the literature. Many IB scholars base their argumentation on the assumption that multinationality implies certain costs that a firm restraining itself to its domestic market might not incur. Such additional costs of multinationality may arise from the liabilities of foreignness and newness (Hymer, 1976; Zaheer, 1995; Zaheer & Mosakowski, 1997).
Furthermore, increasing multinationality often goes hand in hand with increasing geographical fragmentation of the value chain as well as with a multiplication of specific value chain activities of the MNC at different locations. As a result, the costs of coordinating and controlling may rise with increasing multinationality (Lu & Beamish, 2004).
On the other hand, proponents of M-P research argue that multinationality may exert positive effects on firm performance. One argument is that firms may be able to reduce the fluctuation of revenues (and hence the variance of profitability) by geographical diversification (Rugman, 1976).
Furthermore, it is argued that multinational firms have access to better and cheaper resources (including knowledge) and have the advantage of being more flexible regarding the use of these resources (Allen & Pantzalis, 1996). According to this argument, they are able to combine and exploit the advantages of different locations. MNCs may utilize differences in prices and qualities on the various national product, factor and capital markets (Kogut, 1985). Moreover, due to the multiplication of value chain activities, MNCs may react more flexibly to changes in their business environments than their purely domestic competitors. Operating in many countries simultaneously, a multinational network has substantially more real options than a purely domestic firm (Lee & Makhija, 2009).
One of the most prominent arguments why multinationality might be beneficial refers to reaping economies of scale through internationalization (Contractor, 2012; Hitt et al., 1997). By expanding beyond their home market, MNCs are able to generate larger amounts of output. (1) In the case of economies of scale, increasing output is associated, ceteris paribus, with a reduction in average costs per unit. This reduction in costs per unit implies, ceteris paribus, a higher amount of profit per unit and hence a higher amount of total profits.
Unfortunately, hitherto the empirical results regarding the effect of multinationality on performance are characterized as inconsistent or even contradictory. M-P Scholars have reacted to these confusing findings by suggesting non-linear relationships such as U-shaped, inverted-U-shaped, S-shaped or inverted S-shaped (Contractor et al., 2003; Lu & Beamish, 2004; Ruigrok et al., 2007). However, these proposed relationships did not really prove to be empirically more convincing and more valid than their linear predecessors (Berry & Kaul, 2016; Pisani et al., 2020).
In the light of these results, Hennart (2007) casts doubt on the validity of the results of extant research and argues that most of the theoretical arguments why multinationality should lead to a positive impact on performance have to be questioned and cannot be taken for granted. With one exception: the economies of scale argument.
The usage of this argument is prevalent in academic literature when it comes to explaining a positive relationship between multinationality and performance (e.g., Contractor, 2012; Hennart, 2007). However, quite surprising, the empirical relevance of scale effects regarding the performance impact of multinationality has rarely been empirically analyzed explicitly (Abdi & Aulakh, 2018; Fisch & Zschoche, 2011; Richter, 2014). In most cases, the economies of scale argument is used to explain the general idea of a positive relationship between multinationality and performance, usually among other arguments. However, the concept...
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