Academic journal article Multinational Business Review

Value Creation and Home Region Internationalization of U.S. MNEs

Academic journal article Multinational Business Review

Value Creation and Home Region Internationalization of U.S. MNEs

Article excerpt


This study analyzes the relationship between multinationality and performance of 1,247 US multinational enterprises (MNEs) over the period of 1995-2004 by utilizing Tobin's q theory. Internationalization is a double-edged sword: foreign intangible assets create a firm's value, while, at the same time, internationalization itself degrades the value by raising transaction costs and uncertainty in foreign operations. The empirical results show that US MNEs cannot increase their performance merely by developing their intangible assets in the rest of the home region (Canada and Mexico). Conversely, US MNEs rarely suffer from a liability of foreignness in their home region.

Keywords: performance, regional strategy, internalization, liability of foreignness, multinationality, US multinational enterprises.


Internationalization is a double-edged sword. On one side, cross-border activities provide advantages to multinational enterprises (MNEs). The leading theories in international business explain the positive aspects of internationalization, which this paper calls the value creation of internationalization. These theories are internalization theory (Buckley and Casson 1976; Rugman 1981), eclectic theory (Dunning 1988), and organizational capability perspective (Kogut and Zander 1993).

In contrast, internationalization can have a negative effect on a firm's performance by increasing the complexity of control and coordination (Bartlett and Ghoshal 1989) and causing the firm to suffer from the liability of foreignness (Hymer 1976). In this paper, the negative aspects are referred to as the value destruction of internationalization. The negative aspects can be explained by transaction cost economics theory. Thus, foreign direct investment will only occur when the positive aspects exceed the negative aspects, otherwise firms will not expand abroad (Buckley and Casson 1976).

The existing, extensive empirical evidence on the relationship between multinationality and performance is inconclusive and debatable (Tallman and Li 1996; Gomes and Ramaswamy 1999; Lu and Beamish 2004; Contractor 2007). This research focuses on three general considerations. First, previous literature has not fully examined both value creation and destruction of internationalization. To date, the empirical analyses have failed to consider the two aspects together (Dess et al. 1995; Lu and Beamish 2004; Hennart 2007). As a result, mixed findings have occurred due to a biased empirical estimation.

Second, the inconsistent empirical results come from the old perspective of MNE theory, as existing studies assume that internationalization is uniform. MNEs have prioritized areas in international expansion, which was developed by the Uppsala School (e.g., Johanson andVahlne 1977), as MNEs spread out from neighboring and homogeneous countries to distant and heterogeneous countries. However, the existing literature implicitly assumes that all foreign countries have the same strategic importance.

Third, great efforts have been made to find a better fit of empirical model, such as the quadratic or cubic fit, but existing empirical models are likely misspecified due to the lack of an analytical foundation in empirical equations. Even though the S-curve relationship between multinationality and performance could integrate existing international business theories, existing findings are not strong enough to determine the relationship between multinationality and performance. These three points will be discussed in greater detail later.

By controlling for these possible problems, this paper will answer the following questions: Is the internationalization process uniform? What is the relationship between corporate-level assets and performance? What is the relationship between subsidiary-level assets and performance? Which strategy is better - globalization or regionalization?

In order to answer these questions, Tobin's a equation is utilized. …

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