Turning the Tables: The Relationship Between Performance and Multinationality.

VerfasserSchmuck, Alice

1 Introduction

For over 40 years, the multinationality-performance relationship has been one of the most researched and debated topics in the international business domain (e.g., Click & Harrison, 2000; Contractor et al., 2003; Doukas & Kan, 2006; Kim et al., 1993). Overwhelmingly, researchers share the same underlying assumption: multinationality affects performance. They apply different theoretical perspectives and conceptual arguments, yet there are no conclusive findings concerning the form of the relationship (Hennart, 2011; Nguyen, 2017; Verbeke & Forootan, 2012). Clearly, the relationship is important, yet with such disparate findings it is time to fundamentally question the assumption of performance being the outcome, the dependent variable, of internationalization. Classical economic theory of the firm assumes that in competitive markets production will be organized within firms when the costs of organizing are lower than using the price mechanism in markets. Firms exist when efficiencies allow for profits (Coase, 1937). Behavioral management theories recognize that managers have other self-interest motives than firm profit maximization (Eisenhardt, 1989; Williamson, 1979), yet implicitly there is an assumption that through organizing, governing, and motivating, firms will be more efficient (profitable) than doing the same activities in the market. Cyert and March (1992) argue that profitability is one of the major goals of a firm, and within the domain of internationalization, researchers who stand central to the topic conclude that the internationalization process has a positive impact on performance (e.g., Barkema et al., 1996; Delios & Beamish, 2001; Johanson & Vahlne, 2009; Li, 1995; Luo & Peng, 1999; Vahlne & Johanson, 2017). Add to this that most managers are held accountable for performance, the predilection with modeling performance as the dependent variable is understandable. Only a handful of studies have empirically investigated the reverse relationship (Grant et al., 1988; Hong Luan et al., 2013; Jung & Bansal, 2009; Sun & Lee, 2013).

In this paper, we join with Rugman et al. (2016) and turn the tables to investigate the effect of firm performance on multinationality. The form of the relationship - positive or negative - is debatable in this reverse stream as well as in the mainstream research. Some studies argue in favor of a positive relationship, saying that firms only go abroad once their performance enables the necessary and often costly investments (Bilkey, 1982; Eriksson et al., 2015). Others argue that firms with negative financial results, to some extent, are forced to internationalize in order to find business opportunities in new markets (Nummela et al., 2004; Wolff & Pett, 2000).

In order to explain the performance-multinationality relationship, we use two research traditions that address responses to organizational performance. Both traditions rest on behavioral and bounded rationality arguments, yet they predict opposite outcomes. The first tradition builds on arguments from the resource-based view (Barney, 2001; Penrose, 1959) and the Uppsala internationalization process model (Johanson & Vahlne, 2009; Vahlne & Johanson, 2017). Internationalization is, in this tradition, seen as an asset exploitation or resource-gaining opportunity. Firms with good performance have the necessary resources to permit internationalization (Barney, 2001; Penrose, 1959). Accordingly, the better the financial performance, the higher the degree of internationalization. This also means that when performance is negative there are no accessible resources to support expansion into new markets (Tseng et al., 2007).

The second tradition takes its point of departure in prospect theory (cf., Kahneman & Tversky, 1979), where a firm's performance is negatively associated with risk-taking behavior. Internationalization is seen as a risky endeavor rather than a resource-gaining opportunity (Jung & Bansal, 2009). Accordingly, the better the financial performance, the lower the degree of internationalization as satisfaction with the existing performance leads to risk avoidance to conserve earned gains (Sitkin & Pablo, 1992).

In this article we address the research question: What is the nature of the relationship between performance and multinationality? The principal contribution of the study is to, in contrast with the vast majority of existing studies, theorize and test the performance-multinationality relationship. By adopting two different perspectives on managerial decision-making, the paper contributes to an improved understanding of a firm's resource use and risk-averse behavior with regards to internationalization activities. We purposely avoid introducing contextual factors behind internationalization that can moderate the performance-multinationality relationship. While there is a plethora of moderators being tested, with no consensus concerning their role, we choose not to cloud the issue and stick to testing the relationship in its most simple form.

In order to test the relationships, we applied ordinary least square regressions with fixed effects estimators to an unbalanced panel of Swedish publicly listed firms for the period from 2001 to 2013. The results show a U-shaped relationship between firm performance and multinationality, with the inflection point near zero performance. This implies that when firm performance is very negative, internationalization is high. As performance increases, internationalization drops to the inflection point near zero performance, and then it starts to rise as performance increases. Prospect theory provides the rationale that firms with negative performance will risk going abroad to achieve growth and profitability. As performance rises, the incentive to internationalize drops. At around zero performance, in line with the Uppsala model and resource-based theory, managers feel constrained by low performance, and thus limited resources, to finance internationalization. Accordingly, as performance rises, so too does the degree of internationalization. Consequently, by combining the theories we explain why firms internationalize at different level of performance, taking into account managerial risk perceptions.

The remainder of the paper is structured as follows. First, we provide a conceptual overview by reviewing the existing literature on the relationship between firm performance and multinationality. The resource-based perspective on internationalization and prospect theory are discussed next, which respectively make up the foundations for the hypotheses. In the methods section, we describe the data collection and analysis. Then, the results are presented. Finally, we discuss the implications of the results, limitations of the study, and possible future directions for research.

2 Conceptual Overview

2.1 Extant Research on the Multinationality-Performance Relationship

In the internationalization literature, empirical research has mainly focused on the underlying assumption that multinationality has an impact on firm performance. A large majority of authors have followed this logic and empirically investigated the shape of a hypothesized causal multinationality-performance relationship. Almost all empirical aspects and circumstances of this relationship are covered in previous studies and summarized in multiple meta-analyses (e.g., Bausch & Krist, 2007; Geleilate et al., 2016; Kirca et al., 2011, 2012a, b; Marano et al., 2016; Palich et al., 2000; Yang & Driffield, 2012). Kirca et al., (2012a), for example, have conducted a thorough meta-analysis on drivers of firm multinationality and Hitt et al. (2006) provide a detailed summary on previous research. Yet in spite of this, no consistent results have been found.

Given the large variety in results and the often contradictory findings, a clear statement about the nature and shape of the multinationality-performance relationship is difficult to make without considering the different research contexts. Rugman et al. (2016), as well as Hennart (2007), offer strong theoretical arguments for questioning the existence of a systematic relationship between internationalization and performance. To sum up, the search for a generalized multinationality-performance relationship remains elusive (cf., Verbeke & Brugman, 2009).

It is important to keep in mind that the primary emphasis of previous empirical research has been on the performance outcomes of internationalization, and considerably less focus has been on considering performance as the antecedent of internationalization. According to Verbeke and Forootan (2012), only five out of the top 12 most cited studies on the multinationality-performance relationship have considered the possibility of reverse causality (cf., Dowell et al., 2000; Grant, 1987; Lu & Beamish, 2001, 2004; Morck & Yeung, 1991). While these studies raise the idea of the reverse relationship, they do not test it. None of the aforementioned metaanalyses have raised this issue, and only a handful of empirical studies have actually investigated and tested for either a dual or reversed causality.

In 1988, Grant, Jammine, and Thomas conducted a thorough investigation of simultaneous relationships between internationalization and performance, and were thereby probably the first researchers to specifically investigate the causal direction. Their main conclusion was that there is a strong two-way relationship between multinational diversification and profitability. It took 25 years before Hong Luan et al. (2013) addressed the endogeneity bias from preceding studies that arose from the simultaneity between multinationality and performance. In their study, they again found a simultaneous relationship between the two main variables, degree of internationalization and firm performance. Table 1 provides an overview of the dependent and independent variables and the identified shapes of the...

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