Academic journal article Multinational Business Review

Internationalization and Performance: Traditional Measures and Their Decomposition

Academic journal article Multinational Business Review

Internationalization and Performance: Traditional Measures and Their Decomposition

Article excerpt

ABSTRACT: Previous empirical results on the relationship between internationalization and firm performance have been mixed. Both monotonic and curvilinear relationships have been reported. Most recent studies have focused on different types of curvilinear relationships, such as inverted U-shaped, standard U-shaped, and multiple waves. This paper utilizes a more current sample of firms than prior studies have used and decomposes traditional financial performance measures, applying two different measures of degree of internationalization, country scope and foreign sales as a percent of total sales (FSTS), to measure the effects on financial performance of different degrees of internationalization. Several financial performance measures, including traditional indexes (ROE and ROA) and a decomposition of traditional ones (Profit Margin, Total Asset Turnover), are examined.

INTRODUCTION

For the past several decades, overseas expansion has been an important strategy for large companies in both developed and developing countries. Although there has been significant development in the theory of international business and there exists a substantial empirical literature on the causes and outcomes of foreign direct investment (FDI), researchers still suffer from a limited understanding of how the degree of internationalization affects firm performance. The evidence is mixed in explaining the effects of overseas expansion on firm performance.

In the early stages of this field, researchers studied the relationship between the degree of internationalization and performance from different perspectives, such as portfolio investment theory (Markowitz, 1952), the resource-based perspective (Teece, 1971; Wernerfelt, 1984), and the FDI theories (Hymer, 1960; Caves, 1971; Dunning, 1981; andRugman, 1982). Unfortunately, findings based on these streams of research have been equivocal. Empirical studies of the relationship between internationalization and financial performance have reported two different types of a relationship: monotonie (linear) and non-monotonic (curvilinear). Additionally, the findings supportive of a curvilinear relationship have been inconsistent, inasmuch as three different types of a curvilinear relationship have been found: U-shaped, inverted U-shaped, and multiple waves.

In most previous empirical studies, authors used traditional financial ratios, such as return on assets (ROA), return on equity (ROE), or return on sales (ROS), as dependent variables. Properly interpreted, these ratios provide keen insight into the sources and adequacy of profits, the efficiency of assets committed to the firm, solvency risk, and liquidity risk. The key to their effective use is to view financial ratios not as independent numbers but, instead, like pieces of a jigsaw puzzle. Individually they tell only a little about the whole but, taken together, the entire picture of financial health comes into focus.

The ratios that determine ROE reflect three major performance dimensions of interest to all analysts: income statement management (or how much profit a company can generate per sales dollar) and two aspects of balance sheet management: how well assets can generate sales and the amount of solvency risk. The ratios also indicate that there are several paths that a multinational corporation can use to gain a return for its owners: margin, volume, and leverage.

In this study of the relationship between degree of internationalization and performance, DuPont analysis takes us systematically through the major financial ratios and indicates the likely areas of concern. The statistical results show how the DuPont approach is useful for identifying the sources of problems from internationalization.

The purpose of this paper is to examine more carefully the relationship between the degree of internationalization and firm performance. The study adds to existing knowledge by utilizing a more current firm sample than prior studies, and by covering a substantially different perspective. …

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