Academic journal article Management International Review

Is International Business Good for Companies? the Evolutionary or Multi-Stage Theory of Internationalization vs. the Transaction Cost Perspective

Academic journal article Management International Review

Is International Business Good for Companies? the Evolutionary or Multi-Stage Theory of Internationalization vs. the Transaction Cost Perspective

Article excerpt

Abstract and Key Results

* This paper's objective is to articulate, more precisely than has occurred in the past, the principal theory rationales underlying the Multinationality/Performance (M/P) link, by examining each claim for the negative or positive benefits of internalization, from the lens of the theory of the firm and the multinational enterprise. A concurrent objective of this paper is to respond to critiques of M/P theory and discuss methodology and operationalization problems in empirical testing.

* While international expansion of a firm will not necessarily always improve performance (during the initial international expansion stage, or in cases where a firm may have over-internationalized), for the most part, over the considerable middle range of expansion, net positive benefits accrue from internationalization. Underlying theory rationales are detailed in the paper.

* The results of over one hundred empirical studies over the past 30 years appear, on superficial examination, to be contradictory, but can be reconciled by the recently proposed 3-stage or S-shaped general theory.

Key Words

General Theory, Multinationality-Performance Relationship, Past Empirical Results

Introduction

We are in an era when everyone, from Deans to Captains of Industry, seems to subscribe to the notion that internationalization is good for firms. Indeed, the very field of International Business Studies rests upon the meta-hypothesis that increasing internationalization will generally augment company profits, other things being equal. However, empirical studies of the past 30 years have only shown mixed results for the link between financial performance and the degree of a firm's internationalization (e.g., Ruigrok/Wagner 2004). These seemingly contradictory results appear to put into question the entire sub-field of Multinationality/Performance (M/P) studies and the theory underlying them. This paper is a review of the theoretical underpinnings of this literature, as well as a response to Jean-Francois Hennart's article in this issue which views the debate through a Transaction Cost/Internalization (TCI) lens. By taking a deliberately agnostic view of the "Should international expansion produce positive results for companies?" question, Hennart has done our field a service, in forcing us to more critically articulate the theory underpinnings of the positive slope hypothesis for the link between internationalization and financial performance.

I will argue that there are indeed sound theoretical grounds for asserting a positive link between the degree of internationalization (DOI) of a firm and performance. In commenting on the Hennart paper, I propose that the Transaction Cost perspective is a useful, but rather limited lens with which to view this subject. Sometimes Hennart switches to stringent neoclassical views of the firm which abstract too much from current reality and the actual strategies of firms. (1) Moreover, we cannot treat this question in comparative statics terms. The more dynamic, or evolutionary perspective of the recent "multi-stage" models for the Multinationality/ Performance (M/P) field present a more insightful view, and can also reconcile the seemingly contradictory empirical results.

Since multi-stage theories for the multinationality/performance link seem yet to be generally accepted, and since some of Hennart's criticisms can be addressed using this more dynamic perspective, I begin this paper with a quick summary of this theory. Next, this paper specifically responds to Hennart's criticisms and shows how one can go beyond them to offer more robust a priori arguments for the M/P link. Finally, this article discusses methodological issues and offers an explanation of how the seemingly contradictory results of 30 years of empirical studies (e.g., Ruigrok/Wagner 2004) can be at least partially explained through the multi-stage, or evolutionary, lens. …

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