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01-12-2009 | Research Article

How Firm Performance Affects Internationalization

Authors: Ass. Prof. Jae C. Jung, Assoc. Prof. Pratima Bansal

Published in: Management International Review | Issue 6/2009

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Abstract

Only a few studies have investigated whether a firm’s performance has an effect on its internationalization. These studies, focusing on actual firm performance, have suggested a resource-based argument and generally found non-significant results.
In this paper, we argue that relative firm performance is critical in determining a firm’s internationalization because it influences a firm’s attitude toward risk-taking. We apply prospect theory to predict this relationship.
Using time-series, cross-sectional analysis of 701 Japanese firms from 1993 to 1998, we uncovered an inverted-U shaped relationship between a firm’s relative performance and its degree of internationalization using its historical performance target. As compared to the industry target, relative performance showed a positive impact on a firm’s internationalization.

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We had access to the datasets from 1989 to 1998. Yet, the internationalization data were drawn only from 1993 to 1998, because three years of data were used to calculate the relative performance variables and one year of data was used to lag the independent variables in order to allow time to establish or acquire an international subsidiary. For example, the 1989–1991 data were used for estimating the target performance variables in 1992; we used a firm’s relative performance (the difference between actual performance and target performance) in 1992 to determine its internationalization in 1993.

These indicators are based on consolidated information of a parent firm and its subsidiaries.

There are four separate sections within the TSE market: first, second and foreign sections and the venture capital market. The first section includes the largest, most successful companies, often referred to as ‘blue chip’ companies. The second section includes smaller companies with lower trading volume levels. The foreign section includes companies from countries other than Japan. “Mothers” (market for the growth and emerging stocks) includes newer, innovative venture enterprises, from both Japan and overseas.

Firms with international experience may have valuable knowledge about entering and managing in unfamiliar environments, which may facilitate internationalization (Chang 1995). To measure international experience, we considered a firm’s subsidiaries in the world (Delios/Beamish 2001, Ingram/Baum 1997). Yet, due to a high correlation (0.94) between multinationality and international experience, we excluded the international experience from the models.

We also found the qualitatively same main effects from the xtgle and xtgee models.

To ensure that multicollinearity was not an issue, we removed one of those variables from the regression at a time, and there was no material change to the relationship between relative performance and internationalization.

The sum of the number of observations in the above- and below-target data is equal to 4206 observation reported in Table 3.

The result table with the ROS variable is available upon request.

The result tables for the economic crisis effect are available upon request.

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Title: How Firm Performance Affects Internationalization
Authors: Ass. Prof. Jae C. Jung
Assoc. Prof. Pratima Bansal
Publication date: 01-12-2009
Publisher: SP Gabler Verlag
Published in: Management International Review / Issue 6/2009
Print ISSN: 0938-8249
Electronic ISSN: 1861-8901
DOI: https://doi.org/10.1007/s11575-009-0014-7

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