Multinationality and performance: a context-specific analysis for German firms.

VerfasserDittfeld, Marcus
PostenRESEARCH ARTICLE

Abstract The development of foreign markets can be considered as a strategic key factor in times of globalisation. However, past empirical research could not detect a "universal" relationship between corporate multinationality and performance. There exist fundamental doubts whether the contextual condition of internationalisation of one empirical setting can be easily transferred to another setting for investigating the relationship between multinationality and performance. For instance, potentials for realising economies of scale in the home market and abroad, the degree of integration of neighbouring countries, as well as the accumulated internationalisation experience, can differ significantly from each other between countries. Taking into account the contextual conditions of internationalisation of stock-listed German firms in the time period from 1990 to 2006, this paper analyses the performance effects of firms' multinationality. Firms of this sample can benefit from multinationality even in early internationalisation stages and are able to manage high degrees of complexity in later internationalisation stages successfully. Firm-specific advantages in the field of intangible assets with long-term (short-term) effects moderate the relationship between multinationality and future-oriented (past-oriented) performance positive.

Keywords Multinationality * Performance * Contextual conditions of internationalisation * Intangible assets * Economies of scale * Inverted S-curve

1 Introduction

The development of foreign markets has increased substantially since the Second World War. This fact is impressively demonstrated by the progressive growth of the world trade volume and the worldwide stock of foreign direct investments. Thus the world trade volume grew from 59 billion US-Dollars in the year 1948 to 18.4 trillion US-Dollars in 2012 (UNCTAD 2013b). Similarly the worldwide stock of foreign direct investments increased from 699 billion US-Dollars in the year 1980 to 22.8 trillion US-Dollars in 2012 (UNCTAD 2013). However, from a microeconomic point of view this raises the question whether these activities of firms abroad make sense for them in economic terms. How does the development of foreign markets affect firm performance? When and under what conditions can activities abroad influence firm performance in a positive manner? Researchers in the field of international business and other disciplines have developed numerous arguments and theories that make a link between multinationality (M) and firm performance (P). Initial studies in the 1970s investigated a linear positive MP-relationship (e.g., Vernon 1971). In contrast, for instance Click and Harrison (2000) found a linear negative MP-relationship. Later studies identified a U-shaped (e.g., Lu and Beamish 2001; Ruigrok and Wagner 2003) as well as an inverted U-shaped MP-relationship (e.g., Gomes and Ramaswamy 1999). More recent analyses attempted to integrate divergent approaches by a three-stage model (S-curve model), the so called "General Theory" (Contractor et al. 2003). In turn, current investigations discovered an inverted S-shaped MP-relationship (e.g., Ruigrok et al. 2007). Summing up, it can be said that the empirical findings are contradictory. On this occasion Hennart (2007) argued that no systematic MP-relationship exists. Instead the MP-relationship is firm-specific and dependent on moderation effects and their embeddedness in the context. Glaum and Oesterle (2007) and Verbeke and Forootan (2012) reminded us to focus more on the context of the particular sample as well as on the role of moderating factors.

The main contributions of this paper to fill existing research gaps are following: First, with reference to Ruigrok et al. (2007) and to the meta-analysis of Kirca et al. (2012), which explicitely consider the role of contextual factors for the analysis of the MP-relationship, this study attempts to take up the criticism of Verbeke and Forootan (2012) by considering contextual conditions of firm internationalisation and their impact on firm performance. Second, the conceptual paper of Verbeke and Forootan (2012) emphasised the important role of firm-specific advantages in the field of intangible assets for the MP-relationship. Nevertheless, in contradiction to the theory of firm-specific advantages and interalisation theory the meta-analysis of Kirca et al. (2011) could not indicate a significant positive moderating impact for every category of intangible assets on the MP-relationship. However, meta-analysis and single empirical studies have insufficiently considered the time-dependent effectiveness of firm-specific advantages in regard to the time-dependent sensitivity of performance measures. For this reason we measured the moderating effect of intangible assets appropriate to its time-dependent effectiveness by employing past-oriented based accounting as well as future-oriented capital market based performance measures. Finally, regarding the relevance of different economic regions of the world, the current state of the art revealed a systematic overrepresentation of MP-studies with samples of firms from the United States and a lack of studies for firms from Europe. To resolve this shortcoming, this study focus on German firms, which represents the leading economy of Europe.

The paper is organised as follows: In Chapter 2 we describe the state of the art. Afterwards, Chapter 3 presents the hypotheses. Chapter 4 introduces the methodology. Subsequently, Chapter 5 depicts the results. The paper concludes with a discussion in Chapter 6 and summary in Chapter 7.

2 State of the Art

2.1 Theory and Empiricism of the MP-Relationship Independent of the Explicit Consideration of Contextual Conditions

2.1.1 Theories and Empiricism Focusing on the Benefits of Internationalisation

Since the 1970s the question about the MP-relationship concerns the focus of IB-research (e.g., Vernon 1971). Costs of operating in foreign markets are faced with revenues that occur in varying degrees during the different stages of the internationalisation process. In the following section we introduce the most important theories and arguments that link firms' operation abroad with performance as well as the corresponding empiric results. To limit the depiction of the theoretical arguments, we restrict our consideration on those arguments that are able to accomodate the dynamic of the internationalisation process and can explain the role of contextual conditions for the MP-relationship of German firms. Initially, we will introduce theories and arguments that focus on the benefits of internationalisation followed theories and arguments that focus on the costs of internationalisation.

The theory of firm-specific advantages (Kindleberger 1969; Caves 1971; Hymer 1976) assumes that a firm's internationalisation has a positive performance effect if MNCs possess firm-specific advantages. These advantages exist due to imperfections in product and/or factor markets and are often based on intangible assets (e.g., in technologies, products, or brands) or economies of scale. Operations abroad seem to be beneficial if a firm is in charge of firm-specific advantages. Closely linked to this argument is the assumption derived from internalisation theory, multinationality induces positive performance effects if a firm is in charge of intangible assets (Buckley and Casson 1976; Hennart 2007; Kirca et al. 2011). The meta-analysis of Bausch and Krist (2007) as well as those of Kirca et al. (2011) revealed a positive moderating effect of intangible assets in the field of research and development (R&D) on the MP-relationship. However, Kirca et al. (2011) could not find a positive moderating effect of intangible assets in the field of marketing. Both meta-analysis differentiated insufficiently between past- and future-oriented performance measures. The incorporation of the time dimension is essential for the analysis of the performance effect of intangible assets, as outlined later in Sect. 3.2.

A further argument, which is often linked with a positive MP-relationship, concerns economies of scale (e.g., Lu and Beamish 2004; Ruigrok et al. 2007): firms that exhibit a high level of fixed-costs can benefit from economies of scale by operating in foreign countries. Ruigrok et al. (2007) highlighted that specifically firms with small home markets are dependent on operating abroad. However, the majority of studies investigated the performance effect of economies of scale independent of foreign operations (e.g., Click and Harrison 2000; Fauver et al. 2004).

In the context of different environmental conditions, MNCs in contrast to purely domestic firms dispose over additional arbitrage opportunities. Furthermore MNCs possess a greater bargaining and market power than their domestic counterparts due to their size and their international presence (Kogut 1985; Hennart 2007). These issues increase the scope of action and hence their operational flexibility. Yet, the empirical results are mixed. Whereas the majority of contributions discovered a positive relationship (Pantzalis 2001; Lee and Makhija 2009; Fisch and Zschoche 2011a), some studies detected a negative relationship (Christophe and Pfeiffer 2002).

2.1.2 Theories and Empiricism Focusing on the Costs of Internationalisation

In contrast to the preceding explanations, some arguments focus on the costs of internationalisation. Firms that operate in foreign countries are faced with different cultural, legal, and economic conditions than in their home markets. The costs of adaptation to the heterogeneous environment the so-called liabilities of foreignness appear particularly in the case of a first entry into a foreign market or a certain foreign region (Hymer 1976; Zaheer 1995). The adaptation to the new environment can be interpreted as an organisational learning process, where new routines have to be developed and initially serious costs...

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