The Impact of Foreign Operations on Organizational Performance

Article excerpt

In the last decade, global business activities have expanded significantly. The growing amount of research about the internationalization of firms reflects the importance of global business activities for the business world. Literature describes the driving forces for the internationalization of the firm and the implications of internationalization for management (Fatehi, 1996; Meffert & Bolz, 1998). Additionally, a number of economic theories have been developed to analyze the effects of global business activities (Krugman & Obstfeld, 1997; Rose & Sauernheimer, 1995). The common agreement is that global activities enhance the profitability of firms and improve the nation's welfare. A study by Sachs and Warner (1995)found that open economies grow faster than closed ones. Furthermore, economists share the opinion that global business activities will increase in the future. The question investigated in this paper is if global business activities really enhance profitability. Many of the large corporations such as Coca Cola, PepsiCo, Phillip Morris, or Procter & Gamble, and industries such as computer and telecommunication technologies, petrochemicals and aeronautics cannot be imagined without global activities. The increase in international trade in recent years has been driven by small and midsized companies. But why did they enter the global market?

The economic rationale tells us that small and midsized companies would expand abroad if this is more profitable than staying in the domestic market. Another reason for having global business activities would be that these are critical for survival within a certain industry. In this case, global activities do not improve the profitability in comparison to other companies, but they become a strategic necessity (Backhaus, B. schken & Voeth, 1998). The conducted research analyzes the correlation between global activities and profitability. The most likely outcome of the analysis is that small and midsized companies with global activities are more profitable than their domestic competitors without global activities. Firms would need to include the aspect of global activities as a key factor with high priority in their strategic planning. If global activities do not make a difference in profitability, small and midsized companies could be relieved from the current pressure to rush into global market activities. Right now, many companies are standing on the edge of the decision to go global. These companies are often unsure if they should buy into the common opinion that global activities enhance profitability.

Literature Review

International Business has become a much-discussed topic from both managerial and economic perspectives. International Business can be defined as all business transactions that involve two or more countries. It involves the movement of resources, goods, services, and managerial and technical skills across national boundaries. Resources transferred include capital, people, and technology; goods refer to semifinished and finished assemblies and products; services include things such as accounting, legal counsel, banking activities, insurance business, health care, and food services.

A higher degree of interdependency among countries is created by international linkages such as FDI. Between 1985 and 1996, the annual global FDI flow increased from around $60 billion to an estimated $350 billion (Organisation for Economic Co-operation and Development (OECD), 1998). Sales of foreign affiliates of multinational corporations (MNCs) are estimated to exceed the value of world trade in goods and services (WTO, 1996). In 1996, the estimated value of goods exported reached $5,100 billion; the value of services exported totaled $1,200 billion (WTO, 1997). Furthermore, MNCs' intra-firm trade accounts for one-third of world trade, and MNCs' exports to all other firms for another third, which leaves only one-third for trade among national firms without foreign subsidiaries (United Nations Conference on Trade and Development [UNCTAD], 1995). …