Abstract Transaction cost and internalization theory predicts that there are firm-specific optimal levels of multinationality, and deviations from firm-specific optimal multinationality should decrease performance. However, one important unanswered question is why some firms continuously deviate from their firm-specific optimal levels of multinationality. In this conceptual analysis, I argue that continuous deviations from firm-specific optimal levels of multinationality can be explained by decision-makers' use of aspirations. Specifically, if a firm deviates from its optimal level of multinationality and performance decreases, but aspirations are still being met, decision makers will not perceive a problem and will not engage in search processes to identify and implement changes that align the firm with its optimal level of multinationality. In addition, decision makers in smaller firms may respond to shortfalls between aspirations and actual performance with greater rigidity. Additionally, narcissistic decision makers, and decision makers who are highly accountable to external audiences, may retrospectively revise aspirations in the face of shortfalls in actual performance.
Keywords Multinationality and performance . Aspirations . Transaction cost and internalization theory . Multinationality alignment
For several decades, a large and growing body of literature has sought to assess links between multinationality and performance (M-P) (e.g., Almodovar 2012; Contractor et al. 2003; Grant 1987; Shaked 1986). This research has helped us to understand the multinationality and performance constructs (e.g., Goerzen and Beamish 2003; Verbeke et al. 2009), but empirical results have been inconsistent and this research has been criticized for lacking theoretical clarity (Hennart 2007, 2011; Verbeke and Brugman 2009; Verbeke et al. 2009). Additionally, much of the M--P research treats multinationality as a random exogenous construct. Yet, it is reasonable to argue that decision makers within organizations will have various motives, and will consider firm resources and attributes when making decisions, such as decisions about multinationality, to optimize performance (Dastidar 2009; Powell 2014; Verbeke et al. 2009). As a result, it is reasonable to acknowledge that firm multinationality is not a random construct. Instead, individual firm factors should influence internationalization decisions. Furthermore, any claim for a "general" relationship between absolute levels of multinationality and performance is questionable.
Alternatively, Hennart (2011) has highlighted the potential for an approach rooted in transaction cost and internalization (TCI) theory (Buckley and Casson 1976; Hennart 1982). TCI theory offers that 'firm-specific' assets determine when it is beneficial to internalize foreign operations to protect against freeriding that can chip away at a firm's reputation, to ensure that knowledge is not transferred to potential competitors, and to reduce transaction costs in other ways (Hennart 2001, 2010). This emphasis on 'firm-specific' transaction cost factors means that optimal levels of multinationality will also be 'firm-specific' When a firm is aligned with its specific optimal level of multinationality, performance should be optimal. Alternatively, deviation from firm-specific optimal levels of multinationality should be negatively related to performance (Hennart 2001, 2011; Powell 2014). Unlike the extensive body of M--P research, TCI theory offers a functional theoretical chain with clear implications, and as a result, it is important to explore key questions within this promising, but still nascent, approach.
In particular, Hennart (2011) asks why some firms systematically deviate from their firm-specific optimal levels of multinationality, and offers two possible explanations. First, "misfits" may be temporarily misaligned, as the ability to quickly adjust to optimal levels will differ between firms. This explanation makes intuitive sense, as differences in how quickly misaligned firms can adjust to their firm-specific optimal levels of multinationality could come from barriers to adaptation, including the specificity of existing assets, or even institutional characteristics of home and host countries. Additionally, even though managers are motivated to proactively or reactively adjust multinationality to achieve optimal performance (Nickerson and Silverman 2003), continuous environmental change could lead to prolonged misalignment with firm-specific optimal levels of multinationality. However, all else being equal, these types of deviations should be random (Hennart 2007, p. 442). Hence, we can anticipate specific cases where individual firms take more time to align themselves with their firm-specific optimal levels of multinationality, and specific cases where individual firms in continuously changing environments never fully align with their firm-specific optimal levels of multinationality, but these should be random cases. The second explanation is that top managers may resist adjustments towards firm-specific optimal levels of multinationality for various reasons, even if there are performance benefits. At this point, the reasons why decision makers would be willing to continuously accept suboptimal performance are still unclear. Yet, it is important to understand the reasons for continuous deviations because the cumulative negative performance implications of continuous deviation could be quite large. Hence, the motivation behind this conceptual analysis is to offer one explanation for systematic stable deviations from firm-specific levels of multinationality and a willingness of managers to accept sub-optimal performance.
Given that it is decision makers who accept stable deviations in 'misfit' firms, we should be able to understand such deviations through the prism of decision maker cognition. Consistent with recent calls to better incorporate the micro foundations of strategy into strategy theory and research (e.g., Baer et al. 2013; Gavetti 2012), international business researchers have noted the simultaneous lack of attention given to decision maker cognition, and the great explanatory potential of incorporating cognitive processes (Barkema and Shvyrkov 2007; Brouthers and Hennart 2007; Hennart and Slagen 2015). While there were early efforts in this area (e.g., Aharoni 1966), the business of filling this gap in understanding decision maker cognitive processes in internationalization has largely been left collecting dust on the metaphorical shelf of the academy, with the recent exception of Maitland and Sammartino (2015) who offer that the sense making process of individual managers will be influenced by the richness and connectedness of their own mental modes.
In this analysis, I argue that the behavioral theory of the firm and its descendent theories (Cyert and March 1963; Greve 2003a) are particularly well suited for explaining when decision makers respond to problems such as poor performance that could result from misalignment with firm-specific optimal levels of multinationality. Additionally, the behavioral theory and its descendent theories are especially attractive for an effort to link decision-maker cognition to firm-level outcomes such as multinationality, and subsequently performance. Hence, in the current study I draw upon behavioral theory to argue that decision makers will accept suboptimal performance, resulting from deviation from firm-specific optimal levels of multinationality, if aspirations are being met. In addition, I argue that firm size, decision-maker narcissism, and decision-maker accountability to external audiences may also affect this relationship.
2 Theory and Propositions
2.1 Alignment with Firm-Specific Multinationality and Performance
Transaction cost economics offers that in a competitive environment it is more efficient to organize exchanges via markets. However, when it is difficult to accurately estimate values and prices, or when it is difficult to monitor exchange partners, it may be more efficient to organize exchanges within a firm through internalization (Coase 1937; Williamson 1979). While transaction cost economics looks at individual exchanges and stresses the importance of assets specificity, the complementary TCI theory approach (Buckley and Casson 1976; Hennart 1982) has been applied to a firm's overall collection of decisions on whether to organize international interdependencies via markets or hierarchy. Specifically, TCI theory offers that a firm's collection of decisions on how to organize international interdependencies can also be related to efforts to protect organizational reputation from freeriding partners and efforts to internalize markets for knowledge (Hennart 2001).
Given that organizational standing and knowledge are firm-specific assets, optimal configurations of international interdependencies will also be firm specific. This means that depending upon firm-specific transaction-cost factors, the optimal level of multinationality for some firms could be zero multinationality, or no foreign activities organized via hierarchy. On the other hand, depending upon firm-specific transaction cost factors, the optimal level of multinationality for other individual firms can include specific levels of multinationality, where foreign activities are organized via hierarchy. Firm-specific transaction cost factors will determine firm-specific optimal levels of multinationality, and firm performance will depend upon alignment with firm-specific optimal levels of multinationality. If a firm's multinational footprint goes beyond its optimal level of multinationality, or is 'excessive', performance should decrease (Hennart 2011). Similarly, if a firm's multinational footprint is below its optimal level of multinationality, or is 'insufficient', performance should decrease (Hennart 2011). And finally, if a firm's...