Academic journal article Management International Review

An Exploration of the Relationship between Country of Origin (COE) and the Internationalization-Performance Paradigm

Academic journal article Management International Review

An Exploration of the Relationship between Country of Origin (COE) and the Internationalization-Performance Paradigm

Article excerpt

Abstract and Key Results

* The relationship of internationalization with firm performance continues to be a major focus of corporate strategy. While internationalization raises important issues of risk and uncertainty, cross-cultural aspects of employee conduct and consumer behavior, market structure and competition, and political and regulatory dimensions, it also provides new opportunities for growth, profitability and organizational learning.

* This study seeks to contribute to the topic by empirically investigating the influence of the country of origin effect (COE) on the internationalization and performance relationship. COE, as defined here, is a composite variable that serves as a proxy for differential conditions that might exist in the MNC's home country, conditions which would impact the MNC's performance through internalization of attributes connected with its home country.

* The findings of this study offer strong support for the underlying notion that a MNC's home country impacts the internationalization-performance relationship. In particular, a positive linear relationship was found between internationalization and performance in countries with relatively small economies and which have extensive trade in their economy, while an inverted U-shaped relationship was found in countries with larger economies which have relatively moderate trade in their economy.

Key Words

Country of Origin Effect (COE), Internationalization, Performance, Small Open Economies, Large Economies, GDP, Trade in Goods

Introduction

The concept of internationalization and its impact on a firm's performance has long been the subject of intense inquiry and empirical research and continues to challenge international business scholars. From the perspective of theoretical developments, internationalization of a firm has been studied in terms of efficient utilization of its resources, generating economies of scale, market expansion and diversification as a means of controlling political and financial risks, and market share protection under conditions of oligopolistic competition (Kochhar/Hitt 1995, Annavarjula/ Beldona 2000, Elango 2000). Many empirical studies have been conducted on the internationalization-performance relationship, with varied patterns (e.g., positive, negative, U-shaped, and inverted U-shaped) reported. (1) Recently, attempting to combine the inverted U- and U-shaped findings, three studies tested and found support for a horizontal S-shaped relationship. However, even among these studies, differences in patterns are notable. For instance, while Contractor, Kundu, and Hsu (2003), Lu and Beamish (2004), and Thomas and Eden (2004) report a horizontal S-shaped relationship, the nature of slopes reported by Thomas and Eden (2004) is quite opposite to the earlier two studies. This literature has been reviewed in Annavarjula and Beldona (2000), Ruigrok and Wagner (2003), and more recently in Thomas and Eden (2004).

The relationship between a firm's extent of internationalization and its financial performance raises a number of complex issues, as previous research generally accepts the notion that performance outcomes of a firm's international strategy are influenced by three sets of factors, i.e., firm, industry, and home/host country (Kochhar/Hitt 1995). Extant studies incorporate largely firm- and few industryrelated variables in the testing of the internationalization-performance relationship, while country influences are treated as residuals (or in a few instances partialled out using dummy variables). The underlying assumption of this research has been that all factors pertaining to the effectiveness of internationalization reside within the company.

We argue that separate treatment of country in the internationalization-performance relationship will offer greater insights into this topic. The selection of variables includes those controlled by the firm and extends to external, environment-related variables that provide the firm with some type of strategic advantage (or disadvantage) in international markets. …

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