Why Poor Performance is Not Enough for a Foreign Exit: The Importance of Innovation Capability and International Experience.
| Verfasser | Tan, Qun |
| Posten | RESEARCH ARTICLE |
1 Introduction
The trend toward globalization has stimulated many firms to enter foreign markets. However, the decision by a firm to enter a foreign market is not irreversible. Not surprisingly, news media regularly report on firms which have been forced to exit foreign markets. Target's withdrawal from the Canadian market, and Avon Products' exit from the Irish and South Korean market, provide good examples of firms which have recently faced such a decision (Wahba 2015).
While studies on exit strategies were first presented in the 1970s by scholars such as Boddewyn (1979), since then research focused on exit strategies has tapered off in scholarly journals (Kotabe and Ketkar 2009). Consequently, and despite the importance of the topic, we know relatively little about the factors leading firms to exit their foreign markets (Berry 2013; Soule et al. 2014). This gap in the literature is important because it has been argued that firms learn more from past failures than from past successes (Madsen and Desai 2010). Failure suggests that the firm's existing strategy is inadequate and challenges the status quo, thereby encouraging the manager to engage in deep or mindful reflection and search for solutions to correct problems (Morris and Moore 2000; Sitkin 1992; Tsinopoulos et al. 2019).
To address this gap in the literature, this study examines the exit behavior of multinational corporations (MNCs). Exit refers to a foreign direct investment (FDI) firm's decision to liquidate or sell an active operation in a foreign market. While poor performance is expected to play a crucial role in the firm's exit decision, other perspectives are also worth considering (Kolev 2016; Song 2014a). This study builds on the resource-based view (RBV) and its recent dynamic capabilities theory, and focuses on the moderating impact of innovation capability and international experience to account for the firm's exit decision.
Although poor performance may drive firms to exit a foreign market, recent studies have shown that innovation plays a crucial role in the survival and exit of firms (Cefis and Marsili 2011; Deng et al. 2014; Velu 2015) and is considered a critical element for firms that aim to achieve sustained competitive advantage (Porter 1990). This is particularly the case for firms competing in foreign markets whereby the trend towards globalization and intense global competition emphasizes the need for the firms to develop and deliver a continuous stream of innovations. Innovations are, therefore, critical for firms wishing to grow and survive in foreign markets (Hortinha et al. 2011; Tellis et al. 2009). Thus, while poor performance is expected to drive firms to exit foreign markets, innovation capabilities are expected to have an opposite effect on the firms' exit decision. Examining how innovation capabilities may interact with performance, by strengthening or weakening the effect of performance on the exit decision is, therefore, particularly interesting. Moreover, the need to consider the moderating impact of innovation capability has been recently emphasized in studies (e.g., Menguc et al. 2014), and echoes arguments by the RBV and dynamic capabilities theory that how well the firm deploys its resources is dependent on the firms' capabilities. In addition, by adopting the idea of 'resource orchestration' (see Sirmon et al. 2011), this study examines how the moderating effect of innovation capabilities can be further influenced by its international experience.
To this end, the paper addresses the following research questions: (1) what is the moderating impact of innovation capability on the performance-exit relationship? And (2) how does international experience further influence the moderating impact of innovation capability?
Addressing these research questions offers a number of contributions. Firstly, our study empirically investigates the determinants of the firm's exit decision. Considering its recognized importance, it is crucial that more attention is paid to provide a more in-depth understanding on this issue. The focus of innovation capability is particularly interesting because it allows us to assess the opposing roles played by poor performance (that should favor the decision to exit) and innovation capability (which should favor the decision to remain) in determining whether to exit or remain in a foreign market.
Secondly, we contribute to the RBV theory by considering the moderating role of innovation capability. A long-standing criticism that has been raised in the RBV literature is that the level of resources is not sufficient to explain different outcomes (Menguc et al. 2014). Indeed, researchers have questioned whether it is the level of resources or the deployment of such resources that leads to different outcomes (Kraaijenbrink et al. 2010; Newbert 2007). Capabilities refer to a firm's capacity to deploy resources effectively so that inputs can be transformed into desirable outcomes (Barney 1991). The degree to which these resources are deployed to develop effective strategies and make optimal strategic decisions depends on the firms' capabilities (see Ndofor et al. 2015). To this end, the inclusion of innovation capability as a moderator allows us to examine the firm's capacity to deploy resources to achieve the desirable outcomes. Moreover, we also distinguish between incremental and radical innovations to provide a better understanding of the complexities surrounding their effects on the relationship between performance and exit decision. By treating both constructs distinctively, we also address Slater et al. (2014) suggestion that in order to advance knowledge in this area future studies are encouraged to differentiate between incremental and radical innovation. In exploring these constructs separately, the present research shows how incremental and radical innovation capabilities have an opposite effect on the performance-exit relationship, thereby revealing a novel and interesting finding.
Thirdly, this study not only empirically examines previously untested theoretical propositions, but also adds to previous studies by adopting the idea of 'resource orchestration' and exploring how the moderating effect of innovation capabilities can be further influenced by its international experience. Recent developments of both the RBV and dynamics capabilities theory embrace the idea of resource orchestration, suggesting that capabilities need to be further leveraged, and that there is a need to examine the contingencies related to the firms' strategy implementation (Sirmon et al. 2011). We extend both the RBV and dynamics capabilities arguments by theorizing that the ability of firms to leverage their capabilities is further dependent on the firm's international experience. As international experience enables managers to have a better understanding of the foreign market (Casillas et al. 2012), it should influence the firm's ability to leverage its innovation capability in the foreign market.
2 Theory and Research Hypotheses
2.1 Research on Foreign Exit Decision
It has been four decades since the initial research on foreign exit in the 1970s, with the pioneering contributions from Boddewyn and his colleagues (e.g., Boddewyn 1985; Boddewyn and Torneden 1973). Empirical research on the antecedents of exit decision and foreign divestment, however, is still in the early stages of research (Berry 2013). Unlike research on entry and expansion, progress in research on exit has been relatively slow due to the greater difficulty in persuading managers to share data (Benito and Welch 1997; McDermott 2010; Paul and Benito 2018). Based on different perspectives, extant studies have identified various antecedents of foreign exit decision. At the firm level, prior studies mainly focused on factors related to: (1) RBV-based theory; (2) organization learning-based theory; (3) strategy-based theory; and (4) relationship/network-based theory.
In the first research stream, RBV scholars argue that the more resources and capabilities the subsidiaries and their parent firms have, the more likely the subsidiaries will survive in the foreign markets, because these resources and capabilities are the foundation of competitive advantages and superior performance (Barney 1991). Accordingly, empirical research based on RBV has examined and found subsidiaries' and/or the parent firms' performance (Berry 2013; Dai et al. 2013; Song 2015), size (Belderbos and Zou 2009), advantages in intangible assets such as marketing, R&D, and technological resources (Lee et al. 2012) and capabilities (Franco et al. 2009; Giovannetti et al. 2011) have significant impact on the subsidiaries' likelihood of foreign exit.
The second research stream paid special attention to organizational learning theory and argued that the success of foreign subsidiaries relies on the accumulation and utilization of relevant experience (Kang et al. 2017; Paul and Benito 2018), because it helps to overcome the liabilities of foreignness and avoid the pitfalls in foreign operations (Kim et al. 2010). Accordingly, empirical studies based on organizational learning theory generally found foreign exit was negatively associated with subsidiaries' and/or the parent firms' age (Delios and Beamish 2004), international experience (Mata and Portugal 2002), and failure experience in the same country (Yang et al. 2015).
The third research stream showed interest in the influence of strategic aspects. Strategy management scholars believe that specific strategic choices are critical to the success of foreign operations, because different strategies indicate different motivations (Mata and Portugal 2000) and costs in initial investment and subsequent management in the foreign market (Li 1995), which in turn determine the likelihood of subsidiary's subsequent foreign exit. Accordingly, empirical studies found that the likelihood of foreign exit is significantly associated...
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