Academic journal article Management International Review

Information Costs in International Business: Analyzing the Effects of Economies of Scale, Cultural Diversity and Decentralization

Academic journal article Management International Review

Information Costs in International Business: Analyzing the Effects of Economies of Scale, Cultural Diversity and Decentralization

Article excerpt

Abstract The relationship between internationalization and performance is controversial. Prominent in the theoretical arguments about a performance downturn in internationalization are increasing information, coordination, and management costs--an argument for which empirical insights are lacking. Building on a model of information cost, we test for the development of internal information costs during internationalization. Applying a panel procedure on a data set of top manufacturers observed over a 7-year period, we analyze the effects of economies of scale, multinationality or host market diversity and international organizational decentralization on internal information costs. Although internal information costs decline due to economies of scale in international business, they are especially affected by the degree of host market diversity: a growing cultural diversity increases internal information costs per unit. Finally, we find that after a phase of first organizational adaptation processes, international organizational decentralization (and therewith complexity) rises internal information costs. Information cost development plays a major role in theories referring to a performance downswing in a phase of high or culturally unrelated internationalization involving strong organizational complexity. Our results offer empirical backing for these arguments on internal information costs (incorporated into an information cost model).

Keywords Internationalization strategy * Multinationality * Cultural diversity * Organizational decentralization * Information costs

1 Introduction

Over the past decades, the relationship between internationalization and performance has been subject to extensive research; however, this has produced mixed theoretical arguments and empirical results as well as numerous unanswered questions (as outlined by Glaum and Oesterle 2007). Empirical results range from positive and negative links to curvilinear u-shaped, inverted u-shaped, and s-curve relationships between internationalization and performance (see the literature reviews in Yang and Driffield 2012, and Kirca et al. 2011). Recently, scholars have even argued that there is no valid theoretical argument for a universal or generalizable (positive) relationship between internationalization and overall performance (Verbeke et al. 2009; Hennart 2007).

Building on different theoretical streams (most importantly the resource-based view, location and production economics, transaction cost and organizational learning theory), arguments on the overall relationship refer to specific benefits and costs of international growth. From a benefit perspective, studies to a large extent draw on economies of scale: costs are spread over the sales volume in different nations (e.g., Contractor et al. 2003; Delios and Beamish 1999). Furthermore, they draw on organizational learning effects induced by an increase in international business (e.g., Ruigrok and Wagner 2003). Both effects are supposed to lower the costs per unit. From a cost perspective, increased information and/or transaction costs (e.g., communication, coordination, and negotiation) are identified during internationalization, especially development into culturally distant regions (e.g., Boddewyn 1988; Michel and Shaked 1986; Zaheer and Mosakowski 1997; Ruigrok and Wagner 2003; Elango and Prakash Sethi 2007; Pangarkar and Yuan 2009; Tomassen and Benito 2009). When hypothesizing on the interplay of benefits and costs (in inverted u-shaped or s-curve approaches), authors blame escalating information and/or transaction costs in expansion processes into distant regions for the failure to meet overall performance objectives (often observed during a phase of high internationalization) (e.g., Boddewyn 1988; Michel and Shaked 1986; Zaheer and Mosakowski 1997; Ruigrok and Wagner 2003; Elango and Prakash Sethi 2007; Pangarkar and Yuan 2009; Tomassen and Benito 2009).

Hypotheses on the overall performance result of internationalization refer to specific benefits and costs of foreign expansion and to their interplay. …

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