Returns to Internationalization: Business Group-Affiliated Firms vs Standalone Firms.

VerfasserCho, Yunok

1 Introduction

This paper seeks to explore the relationship between particular ownership structures and firm level returns to internationalization. We do this by asking two related questions. First, whether the returns to internationalization for business group (BG) affiliated firms differ from those of standalone firms. Second, we address why this difference exists, through the lens of internalization theory, by exploring the role of firm-specific advantages (FSAs) and firm's ability to generate resources in this relationship. Thus, we seek to build on an established literature of internalization and institutional voids (Buckley & Casson, 1976; Khanna & Palepu, 1999, 2000a, 2000b; Kirca et al., 2011; Kumar et al., 2012; Luo & Tung, 2007; Mathews, 2006; Rugman & Verbeke, 2003).

The essential premise of this study is that under certain institutional frameworks, BG structures bestow certain advantages over standalone firms. At the heart of the study therefore is internalization theory. We seek to explore internationalization through the relative importance of country-specific advantages (CSAs) or FSAs, following Rugman (1981, 2008, 2010), and equally we seek to understand how the interaction between these advantages drive performance. While the existing literature provides a convincing link between CSAs, BG formation, and institutional voids (Dieleman et al., 2022), it places less emphasis on the nature of FSAs in the internationalization process, though the net influence of internationalization on performance can vary in its magnitude with the value of FSAs (Kirca et al., 2011). As we discuss below, we seek to draw insights from the literatures on internalization, institutional voids, and the returns to foreign direct investment (FDI), to explore and explain the differences in the returns to internationalization of these different groups.

For example, Holmes et al. (2018) propose a research agenda on internationalization of BGs, identifying the potential ambiguities resulting from interactions between corporate governance and international strategy. And Barnard (2021) scrutinizes at length the internationalization strategies of emerging market firms and proposes a set of relationships covering the importance of institutions and FSAs for explaining internationalization. Hejazi et al. (2021) emphasize the learning effects from FDI, but the challenge is to develop a framework to consider these two questions together, exploring both the relationship between ownership structure and FDI and then subsequently the returns to that FDI. We therefore adopt the overarching theoretical hook of using internalization theory, similar to Gaur et al. (2019), to explore differential returns, not merely to internationalization, but in terms of the differential ability of firms to exploit FSAs or ability to generate resources into successful internationalization.

BG affiliations often result from institutional voids and allow firms to utilize internal markets for key resources, such as capital and technology (Banerjee et al., 2015; Elango & Pattnaik, 2007). Pattnaik et al. (2021) go one stage further in their analysis, arguing that the ability to overcome institutional weakness provides important experience in the internationalization process. As Shin et al. (2021) emphasize, an unanswered question concerns whether being part of a BG can itself be considered an FSA, or whether it is the case that BGs are better placed to generate advantages through the use of internal markets for capital and knowledge. The previous literature in this area and the context in which our study is positioned are presented in Table 1.

Table 1 demonstrates that most of the past research on internationalization-performance relationship have not addressed the moderating effect of BG affiliation on the internationalization-performance relationship. Some studies, including Gaur and Kumar (2009) and Gaur and Delios (2015), have addressed the effect of BG affiliation but have provided unclear findings (Aguilera et al., 2020). Table 1 also highlights that past research has rarely addressed the impact of the ability to generate FSAs and ability to generate resources on the internationalization-performance relationship.

We argue therefore that the existing literature needs to consider the interaction between institutional voids and the ability of firms to generate and exploit FSAs in order to understand the gains from internationalization for both BG and non-BG firms. This is not discussed in the literature that focusses on institutional voids, nor in the more traditional internationalization-performance literature. Essentially, the effect of internationalization on firm performance is still controversial (Garbe & Richter, 2009; Richter, 2014). In particular, in exploring the relationship, Bhaumik et al. (2010), and the literature that develops from it, (for a discussion of this literature, see Debellis et al., 2021), for example, often tend to focus on differences in internationalization between different groups, using the institutional voids literature to explain the prevalence of different groups. Richter (2014) also sheds light on the inconsistent findings yielded by extant empirics examining the relationship between internationalization and performance. In turn, the literature on the returns to internationalization, building on Contractor et al. (2007) and Garbe and Richter (2009), considers the ability to lever the types of FSAs in internationalization, specifically in overcoming liability of foreignness. This however focusses on the nature of the statistical relationship between FDI and performance and compares firms from different home country contexts. The literature on the multinationality-perforrnance relationship is discussed in a number of review papers, see for example Yang and Driffield (2012), and Richter et al. (2017), so we do not intend to go into this literature in detail. However, building on the critique of Hennart (2007, 2011) we argue that these reviews highlight the need to understand both heterogeneity at the firm level, as well as the ability to lever combinations of assets into internationalization (Lee et al., 2021).

Building on the above discussion, we seek to consider the nature of the FSAs that different firms are able to generate, and how these may be translated into performance, which allows us to consider the somewhat mixed results from the previous literature in a holistic way through the lens of internalization theory. Specifically, we hypothesize that when BGs develop unique sets of ownership advantages that can be exploited through internationalization, BG affiliates improve their returns to internationalization compared with standalone firms by exploiting these ownership advantages, even though merely being affiliated to a BG does not bring better returns to internationalization than standalone firms.

We test our hypotheses using a sample of 356 family firms from South Korea (hereafter, Korea) over the period 1980-2013, of which 319 firms are affiliates of family-controlled BGs and 37 are standalone family firms. Results of our hypotheses testing provide us three findings. First, we find that the marginal returns to internationalization for BG affiliated firms are lower than those gleaned by standalone firms, which is counterintuitive to the strongly held belief that by merely being affiliated to a BG, firms can achieve better returns to internationalization. Second, we show that an ownership advantage that BG affiliates are able to exploit through internationalization in comparison to standalone firms is the ability to generate FSAs such as investment in research and development (R&D). Finally, we also show another ownership advantage that firms affiliated to BGs are able to exploit through internationalization is the ability to generate resources such as better financing. In sum, our second and third findings show that BGs develop unique sets of ownership advantages that can be exploited through internationalization.

Korea provides an excellent context to conduct our study for at least two reasons. First, while it is important to recognize that Korea, as an Organization for Economic Co-operation and Development (OECD) member and with a Gross Domestic Product (GDP) per capita very close to the OECD average, may no longer be considered an emerging economy, many of its institutions and business nomenclatures still reflect its history. There remains a degree of opacity in business relationships and ownership structures, reflecting the historical legacy of the country's institutions, thereby making it an ideal setting to study BGs that have played a significant role in compensating for the country's institutional voids (Almeida et al., 2015; Chang & Hong, 2000; Gormley et al., 2015; Kim & Song, 2017; Shin & Park, 1999). Second, due to the country's export-driven economic policy, Korean firms have a strong orientation towards internationalization, which provides an appropriate empirical context to test our arguments on the relationship between BG, FSAs, and returns to internationalization.

The remainder of our paper is structured as follows. We begin with exploring various aspects of the literature, covering BGs, internationalization, and returns. Building on this, Sect. 3 develops three hypotheses, with Sect. 4 presenting the data and the tests of the hypotheses. Section 5 discusses the findings in detail, and Sect. 6 concludes by discussing various implications of this study and avenues for future work.

2 Literature Review

BGs are the most common form of inter-firm networks (Dau et al., 2021; Elango & Pattnaik, 2007; Khanna & Palepu, 2000a) and are controlled by a core entity (usually a family). The core administrative entity within BGs provides member firms with common administration, managerial coordination, and privileged access to each other's resources. This creates an institutional structure within which...

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