The effects of the degree of internationalization on firm performance

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Abstract

This study developed and tested a model that attempts to describe the influence of internationalization on firm performance. Degree of internationalization was measured by foreign revenues/total revenues. Results based on data from a cross-sectional set of U.S. multinational firms find evidence of a nonmonotonic relationship between degree of internationalization and firm performance. The rate of return on assets declines, then increases, and finally decreases slightly as the degree of internationalization increases.

Introduction

The level of the degree of internationalization of most large U.S. firms has been increasing steadily, ranging from 10 to over 90% of total operations. One question frequently asked is if these foreign operations make any difference in the firm performance. However, results from the financial performance effects of multinationality have been inconsistent (Sullivan, 1994). The studies reported either a positive, indeterminate, or negative relationship. The disarray may be easily attributed to a misspecification of the nature of the linear relationship. While most studies examined a simple linear relationship between DOI and financial performance, this study argues for the existence of a nonmonotonic relationship. Basically, it is hypothesized that the rate of return on assets declines, then increases, and finally decreases slightly as the degree of internationalization, measured by foreign revenues/total revenues, increases. The results based on a cross section of U.S. multinationals from Forbes' `Most International' 100 U.S. Firms find evidence of the nonmonotonic relationship for the 1987–93 period.

Section snippets

Theoretical framework

Numerous theories in the international business literature explain the emergence of the multinational corporation. According to the monopolistic advantages foreign direct investment (FDI) theory, firms undertake FDI to get monopolistic advantages (Hymer, 1960). For the internalization FDI theory, the multinational corporation emerges because it is more beneficial to the enterprise possessing these advantages to internalize them (Rugman, 1980, Dunning, 1995). Finally the eclectic theory of

Method

The hypothesis states that firm performance, as measured by the rate of return on assets, is associated with the degree of internationalization, as measured by foreign revenues/total revenues, in a piecewise linear fashion. Control for size is accomplished by introducing the logarithm of assets as a control variable.

The piecewise linear regression model allowing for two changes in the slope coefficient of the degree of internationalization is as follows:PERFi=a1+a2DOI1i+a3DOI2i+a4DOI3i+a5lAi+ui

Sample selection and descriptive statistics

Since 1979, Forbes has annually ranked the `Most International' 100 American Manufacturing and Service firms on the basis of total revenues. All the firms in Forbes' classification from 1987 to 1993 were included in our sample, resulting in 612 firm year observations. Data on profit and assets were obtained from the Compustat Annual Primary–Secondary–Tertiary database. Table 1 presents the descriptive statistics on foreign revenues/total revenues (FRTR), profits, assets and rate of return on

Empirical results

The MARS technique fits a model in the form of an expansion in product line spline function of predictors (Lewis & Stevens, 1991; Friedman, 1991). The two thresholds identified by the program were 14 and 47% for foreign revenues/total revenues. They were used as level one and level two in the piecewise linear regression between, on one hand, the rate of return on assets of multinational firms, and, on the other hand the three ranges of degree of internationalization and the logarithm of total

Conclusions

The results of this study show a nonmonotonic relationship between firm performance, as measured by the rate of return on assets, and DOI, as measured by foreign revenues/total revenues. They support the existence of a dual threshold point that defines better the nature of the relationship, with a negative relationship under 14%, a positive relationship between 14 and 47%, and a negative relationship for a degree of internationalization higher than 47%. The `More Multinationality is Better'

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