Internationalization speed and firm performance: A study of the market-seeking expansion of retail MNEs.
| Verfasser | Mohr, Alexander |
| Posten | RESEARCH ARTICLE - Abstract |
Abstract Existing research is divided on whether firms that rapidly expand their overseas operations perform better than firms that internationalize slowly. Drawing on Penrose's theory of the growth of the firm, we argue that the positive effects of rapid internationalization give way to negative effects with increasing internation-alization speed, leading to an inverted U-shaped association between internation-alization speed and firm performance. We analyze the market-seeking expansion of 110 retailers over a 10-year period (2003-2012) and find support for a curvilinear relationship between internationalization speed and firm performance that is mod-erated by the geographic scope of firms' internationalization path and firms' international experience. Our study contributes to resolving conflicting views on the link between internationalization speed and firm performance.
Keywords Speed * Firm internationalization * Firm growth * Retail sector
1 Introduction
In contrast to the question of how quickly firms become international after their foundation, there has been comparatively little research on the speed with which firms expand their operations internationally after their first international expansion or after being focused on their home market for an extended period of time (e.g., Hilmersson and Johanson 2016; Casillas and Acedo 2013; Bell et al. 2001). Despite growing interest in the factors that influence the speed of such ongoing firm internationalization (e.g., Casillas and Moreno-Menendez 2014; Mohr and Batsakis 2014) and even though there exist strong reasons to expect internationalization speed to affect firm performance, we know very little about the potential effects of this type of internationalization speed on firm performance (Chang and Rhee 2011; Hilmersson and Johanson 2016).
In particular, given the contradictory suggestions in the literature regarding the likely performance effects of rapid internationalization, there have been calls for further clarification of the effects of internationalization speed on firm performance (Casillas and Moreno-Menendez 2014). Whereas research based on the stages theory of firm internationalization has stressed the importance of an incremental, slow internationalization process for firm performance (Barkema and Drogendijk 2007), research on competitive dynamics (Hennart and Park 1994; Powell 2014; Mascarenhas 1986), the international expansion of emerging market firms (Bonaglia et al. 2007; Mathews 2006), and the development and launch of new products (Cohen et al. 1996; Luo and Tung 2007; Eisenhardt and Tabrizi 1995) all highlight the positive effect of rapid international expansion for firm performance. Accordingly, recent research has begun to explore the non-linear and contingent nature of the relationship between internationalization speed and firm performance (Hilmersson and Johanson 2016; Chang and Rhee 2011).
With this study, we aim to extend this body of research and contribute to closing the gap that exists with regard to our understanding of how the speed of firms' international expansion affects their performance. We do so by drawing on the work of Penrose (1959) to argue that there is a non-linear effect of internationalization speed on firms' performance that is moderated both by the geographic scope of firms' expansion path and by their international experience.
Drawing on Penrose's (1959) insight into the limits of rapid firm growth allows us not only to theorize about the performance effects of internationalization speed but also to expand the scope of the Penrosean perspective to explain internationalization speed as an under-researched facet of firms' internationalization strategies. We suggest that although slow international expansion fails to provide firms with the benefits of rapid internationalization, excessively rapid international expansion leads to diseconomies of time compression that reduce the net benefits of rapid internationalization. We thus argue for an inverted U-shaped effect of internationalization speed on firm performance, i.e., that firm performance is highest at moderate levels of internationalization speed.
We identify two moderators based on both the role that Penrose (1959) attributes to the complexity of firm growth and the role of experience in influencing firms' growth rates. Specifically, we argue that the geographic scope of firms' internationalization path and firms' international experience will influence the balance between benefits and costs at different internationalization speeds. The costs of rapid internationalization are likely to rise with the geographic scope of a firm's internationalization path because of the greater complexity that the firm will be faced with. However, we suggest that the benefits of rapid internationalization grow even stronger with increasing geographic scope because firms are more likely both to gain first-mover advantages and to obtain and exploit strategic resources. We thus expect to find a positive moderating effect of the geographic scope of firms' internationalization path. In addition, Penrose (1959) has stressed the positive influence of experiential knowledge on the rate of firm growth. We thus expect firms' international experience to eliminate or at least reduce some of the costs associated with rapid internationalization.
We test our hypotheses by using a feasible generalized least squares (FGLS) regression on data on the international, market-seeking expansion of 110 multinational enterprises (MNEs) in the retail industry over a 10-year period (2003-2012). The retail sector is a particularly suitable setting for our study given the particular relevance of time-based competition in this sector along with anecdotal evidence from retailers that have rapidly internationalized their activities (Mentzer et al. 2000).
2 Theoretical Background and Hypotheses
2.1 The Relationship Between Internationalization Speed and Firm Performance
We suggest that rapid internationalization will have a positive effect on firm performance by increasing the scope of first-mover advantages and the speed with which firms exploit and acquire valuable assets. First, rapid internationalization increases a firm's potential to obtain a first-mover advantage. Firms may create or obtain valuable resources that are difficult to imitate for latecomers to a market and/or put themselves in a better position to exploit their existing strategic resources (Lieberman and Montgomery 1988). In the context of retail expansion, first-mover advantages can relate to firms' ability to access and secure desirable retail locations and thus block out or pre-empt late-arriving competitors (e.g., Gielens and Dekimpe 2001, 2007). First-mover advantages are particularly important when a small window of opportunity exists for the introduction of products and services into a new market (Chang and Rhee 2011). Therefore, a slow internationalization process can be detrimental to firm performance by reducing a firm's chance of achieving a first-mover advantage (Lee et al. 2000). The probabilistic nature of this argument must be stressed, however, given that high internationalization speed per se does not guarantee a first-mover advantage; equally, a slow internationalization process does not necessarily preclude firms from obtaining such an advantage (Mohr et al. 2014).
Second, even if firms are unable to obtain a first-mover advantage in a particular market, rapid internationalization allows firms to quickly acquire and develop their strategic resources (for example, the outlets of a local retailer), which allow them to quickly improve their position vis-a-vis their competition (see, for example, Bonaglia et al. 2007; Mathews 2006). For this reason, rapid internationalization is argued to be key means for firms from emerging economies to build up and acquire strategic resources and catch up with their competitors from developed countries (Luo and Tung 2007).
Third, rapid internationalization allows firms to exploit their valuable resources more quickly. The rapid exploitation of firm resources has positive effects on firm performance because it minimizes opportunity costs and maximizes the value extracted from these resources before they become eroded and obsolete (Chang and Rhee 2011). For example, retailers that have developed or acquired strong and internationally recognized brand names, for example, H&M, IKEA, or Zara, are more likely to opt for rapid internationalization to exploit this valuable resource than are firms whose brands are lesser known. Such erosion may occur when competitors replicate particular resources or find substitutes and when resources become obsolete, for example, because of changes in consumer preferences (Lieberman and Montgomery 1988).
Although we expect the above benefits to increase with rising internationalization speeds, we also expect them to become increasingly offset by the exponentially growing costs associated with higher internationalization speeds, leading to diminishing net benefits as internationalization speed increases. In Penrose's (1959) theory of the growth of the firm, limited managerial resources play a central role in constraining the growth rate of firms. Firms that fail to account for the factors that limit their growth will suffer from inefficiencies and lose their competitive advantage (Kor and Mahoney 2004). Increasing internationalization speed will thus strain a firm's limited managerial resources and its absorptive capacity, i.e., firms' ability "to recognize the value of new, external information, assimilate it, and apply it to commercial ends" (Cohen and Levinthal 1990, p. 128). As a result of this strain, firms will experience diseconomies of time compression, i.e., exponentially increasing costs and inefficiencies, when accelerating their resource development and exploitation processes (Dierickx and Cool 1989; Vermeulen and Barkema 2002...
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