Traditional Measures and Their Decomposition

Internationalization and Performance: Traditional Measures and Their Decomposition

Hsu, Chin-Chun

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. First, this study tests the relationship of MNEs’ performance to the degree of internationalization (linear or curvilinear), an issue not clear in the literature. second, it examines the effect of two different measures of internationalization-country scope and foreign sales as a percent of total sales (FSTS)-on different measures of performance (ROE, ROA, Profit Margin, Total Asset Turnover). Finally, the interactive effects of depth of internationalization (FSTS) and breadth of internationalization (country scope) on MNEs performance are examined.

LITERATURE REVIEW

International business scholars have looked at the relationship between degree of internationalization and performance from a variety of theoretical perspectives, namely, a resource based view (Barney, 1991; Chandler and Hanks, 1994; and Wernerfelt, 1984), portfolio investment theory (Markowitz, 1952), and the foreign direct investment theories (Dunning, 1981; Rugman, 1982). A review of the literature reveals that several empirical studies have been done on this topic, but with a focus on firms in the manufacturing sector. Grant (1987) concluded that two avenues of research have examined the relationship between the firm’s degree of internationalization and its performance. The first, classified as comparative studies, investigates whether or not multinational corporations outperform their domestic rivals, as explicated in the works of Vernon (1971), Horst (1972), Leftwich (1974), Hughes, Logue, and Sweeney (1975), Jacquillat and Solnik (1978), Senchack and Beedles (1980), Brewer (1981), Fatemi (1984), Shaked (1986), and Collins (1990). The above studies are founded on the comparison of profitability and risk levels of multinational corporations to that of domestic corporations. There is no clear-cut evidence on the nature of the relationship between degree of internationalization and performance.

The second group of studies used control variables (research and development intensity, firm size, industry effect) to examine the relationship of internationalization to performance. These include the works of Buckley, Dunning and Pearce (1977, 1984), Siddhathan and LaI (1982), Kumar (1984), Grant (1987), Daniels and Bracker (1989), Chang and Thomas (1989). Morck and Yeung (1991), Sambharya (1995), Ramaswamy (1995), Al-Obaidan and Scully (1995), Gomes and Ramaswamy (1999), and Tallman and Li (1996). The significant findings in the above-mentioned studies were the existence of some kind of “internationalization threshold” for multinational enterprises. Geographic diversification would lead to enhanced corporate performance up to a point beyond which the organizational costs and complexity associated with managing widely scattered operations would outweigh the advantage.

Based on the theoretical foundation for the advantages of internationalization, many international business scholars have concluded that a firm’s performance is positively related to its level of foreign involvement. Theories that support diversification into international markets propose reduced risk of bankruptcy and increased sales and, in turn a higher accrued value to the firm. In support of this hypothesis, many scholars have observed a positive, linear internationalization-performance relationship. Others have found no relationship or a negative one. Table 1 depicts the range of findings by authors who have conducted empirical studies on the existence of a monotonie relationship between internationalization and performance.

Recognizing that there are costs to international expansion, most recent studies contend that the relationship is not a monotonie but a curvilinear one. Geographical diversification would lead to increased corporate performance up to a point beyond which the organizational costs and complexity associated with managing widely scattered operations outweigh the advantages. Several empirical studies observe that performance increases as strategic resources are leveraged across national borders and performance falls off as the scope of internationalization exceeds the range of these resources (inverted u-shaped curve). Table 2 depicts the results that support a curvilinear relationship between the degree of internationalization and performance. The types of curvilinear relationships observed include inverted U-shaped, standard U-shaped, and multiple waves.

Given the strategic importance of internationalization, international business scholars have studied internationalization from two different perspectives. The first is the study of the “depth of internationalization” and the second is the “breadth of internationalization.” The most commonly used measure to examine the degree of internationalization is the ratio of foreign to total sales (Geringer, Beamish and daCosta, 1989; Grant, Jammine and Thomas, 1988). Other measures that have been used in previous studies are the ratio of foreign assets to total assets (Ramaswamy, 1993) and the ratio of employees in foreign locations to total employees (Kim et al., 1989). All the above measures tend to capture the depth of internationalization.

There has been some research that investigates the “scope/breadth of internationalization” by examining the geographical dispersion of operations across countries. Multinational enterprises tend to leverage location-based advantages to enhance their performance (Kogut, 1995). Ramaswamy (1993) measured configuration as the number of overseas plants and found a significant positive relationship to performance. On the other hand, Shaked (1996) defined multinational corporations as having 20 percent of sales outside the home country and direct investment in at least six countries. Most studies can be criticized for their use of a unidimensional measure of internationalization. Sullivan (1994) identified the need for a multidimensional construct, but Ramaswamy, Kroeck, and Renforth (1996) found little support for a multidimensional measure.

As seen from the above discussion, there is no consensus for measuring the “degree of internationalization,” nor is the exact nature of the relationship between internationalization and firm financial performance known. Given the overall absence of clear research findings in this area, this study examines the nature of the internationalization-performance relationship by subjecting different financial performance ratios and their decomposition to investigation. It is predicted that the relationship between internationalization and firms’ traditional financial ratios (ROE, ROA) will differ from the relationship between internationalization and the decomposition of these financial ratios (Net Profit Margin, Total Asset Turnover, Leverage), and the results will thus reveal new information about the relationship between internationalization and financial performance. The findings should be of considerable interest to international business academicians and practitioners.

HYPOTHESES

Consistent with most of the more recent findings on the relationship between internationalization and performance, and based on the logic presented below, this study proposes that multinationals’ financial performance will vary with their degree of internationalization in an inverted U-shaped, curvilinear relationship. We propose that financial performance initially will increase as firms benefit from the process of internationalization. Increased sales, reduced sourcing costs, reduced risks from diversification, and economies of scale and scope are all outcomes associated with the process of internationalization that could lead to improved financial performance. However, financial performance can be expected to fall off once the greater complexity associated with international expansion exceeds management capabilities of coordinating activities across many different countries, and as governance and coordination costs surpass the benefits of internationalization. It is predicted that the advantages of internationalization are greater than its disadvantages at lower levels of internationalization but, at higher degrees of internationalization, the advantages are offset by the disadvantages, including managerial constraints and resource limitations. Our thinking about the costs of global coordination is influenced by Williamson’s (1975) thoughts on hierarchy and Simon’s (1955) thoughts on the difficulty and expense of processing large amounts of information. Based on the above scenario, we predict an inverted U-shaped relationship between internationalization and the variety of financial performance measures presented in the following hypotheses. While other authors have also proposed a non-linear relationship, they have not tested it using both ROE and the related financial measures of which ROE is composed, as we do.

ROE is an important financial measure, but it does not communicate the level of risk to which a company is exposed or the overall efficiency with which a firm’s total assets are employed. seeing both ROA and ROE gives a better picture of performance because it demonstrates the degree to which returns are dependent on leverage. It is also useful to see the degree to which financial performance is based on profit margin or total asset turnover. These two measures, generally found to have values inversely related to each other, combine to affect both ROE and ROA. Our four hypotheses regarding these financial measures follow.

Hl : all else being equal, for multinational companies, the relationship between the degree of internationalization and firm performance, measured by ROE, will be characterized by an inverted U-shape, with a slope that is positive at lower levels of internationalization and negative at higher levels of internationalization.

H2: all else being equal, for multinational companies, the relationship between the degree of internationalization and firm performance, measured by ROA, will be characterized by an inverted U-shape, with a slope that is positive at lower levels of internationalization and negative at higher levels of internationalization.

H3: all else being equal, for multinational companies, the relationship between the degree of internationalization and firm performance, measured by Profit Margin, will be characterized by an inverted U-shape, with a slope that is positive at lower levels of internationalization and negative at higher levels of internationalization.

H4: all else being equal, for multinational companies, the relationship between the degree of internationalization and firm performance, measured by Total Asset Turnover, will be characterized by an inverted U-shape, with a slope that is positive at lower levels of internationalization and negative at higher levels of internationalization.

Figure 1 provides the conceptual framework for the relationship between degree of internationalization and performance, measured by ROE and its decomposition (profit margin, total asset turnover, and leverage). Figure 2 provides the conceptual framework for the relationship between degree of internationalization and performance, measured by ROA and its decomposition (profit margin and total asset turnover). According to our models, degree of internationalization influences the ROE, ROA, profit margin, and total asset turnover variables shown in Figures 2 and 3. Increased internationalization involves MNEs acquiring greater access to markets, supplies and materials, knowledge, human capital, technology, financial capital, and strategic choices, all of which can be expected to impact company financial performance, generally in positive ways. However, increasing internationalization also produces increasing complexity that can affect financial performance measures, often negatively.

The difference between Figure 1 and Figure 2, and the difference between ROE and ROA, is the existence and impact of debt, or leverage. Leverage increases firm financial risk, and it is generally used because it is perceived to be cheaper, faster, or more easily accessible than equity. We make no prediction in regard to the level of financial leverage as preferences for leverage may vary across firms and industries.

DATA COLLECTION AND METHODOLOGY

Sample

The data used in this study has been taken from Hoover’s 750 U.S. Major Public Companies over the period of 1996-98. The companies selected from the Hoover’s 750 list were based on the availability of data from the companies with foreign operations. A summary of the data used is as follows:

The information from foreign operations was obtained from Hoover’s and the Worldscope database. Financial data was obtained from PC-COMPUSTAT, Moody’s Financial Information Service (FIS) online, and company 10-K reports.

Methodology

Variables

Dependent Variables

In order to provide adequate research validity and comparability, the financial performance measures chosen are ROE, ROA, and their decomposition components: Profit Margin, and Total Asset Turnover.

* ROE: Return on equity is the accounting ratio often used to measure management’s effectiveness and to reward the management. Although numerous measures can be used as proxies for profitability, the return on equity is one of the most commonly employed accounting measures in the international business research (Qian 1997b). This is because return on equity focuses on the relative efficiency with which the resources available have been utilized by a firm to earn profit on behalf of its shareholders.

* ROA: Return on assets has been widely used in many previous studies on the relationship between degree of internationalization and performance (Daniels and Bracker, 1989; Haar, 1989; Ramaswamy, 1995; Gomes and Ramaswamy, 1999). It measures the efficiency with which assets are employed.

Independent Variables

Degree of internationalization has been conceptualized from two dimensions: financial and geographical.

* FSTS: The ratio of foreign sales to total sales is the financial concept of internationalization that captures MNEs’ monetary or revenue dependence on foreign markets.

* Country scope: Measured by the number of countries generating sales, it is the geographical dimension that describes internationalization in terms of the number of foreign country markets in which a multinational is active.

Control Variables

* R&D Intensity: Dunning’s “eclectic model” (1988, 1993) applies a logic similar to resource-based models to the MNE. It proposes that a firm with profit-making internal capabilities (ownership factors) will seek additional profits in international market locations. If these capabilities are embedded in the firm’s structure, then these international markets will be internalized by FDI, ensuring the best application of these capabilities while protecting them from compromise (Buckley, 1988). In previous studies, researchers, such as Kotabe, et al (2002), have applied R&D intensity to represent the ownership advantages of MNEs.

We explicitly control for R&D expenses, which may have either a positive or negative effect. On the one hand, firms that invest heavily in R&D are most likely profitable, successful firms. The industrial organization economics literature suggests that R&D intensity is an important determinant of firm profitability (Hay & Morris, 1979) and, according to Hay & Morris (1979), high investment in R&D is generally a high risk-high return strategy that is attractive to shareholders in anticipation of better financial performance. On the other hand, R&D expenses can hurt the firm’s net income so that it has a negative effect on financial performance. Mansfield (1968) stated that executives would be reluctant to invest in long-term R&D projects because innovative projects have high failure rates and do not yield short-term returns. The ratio of R&D expenses to sales is a standard measure of firms’ investment in R&D. Additional control variables likely to affect MNE performance, firm size and industry, are included in the study.

* Firm size: Firm size, a common variable related to firm performance, was used to control for economies and diseconomies of scale at the corporate level. According to the rationale behind the “firm size effect” (Banz, 1981), as firm size increases, it becomes more difficult to sustain impressive performance. Thus, when a firm is large, financial performance is expected to be lower. In this study, firm size was measured by the natural logarithm of total employees for all models. Natural logarithm transformation is usually applied to the variables that are not taken as ratios. Log transformation will not only make the results easy to interpret because the changes in the logarithm domain represent relative (percentage) changes in the original metric, but it also makes the distribution of the data closer to a normal distribution.

* Industry effect: Prior research has showed that industry effects have important impacts on cross-sectional variation of firm performance. Some studies have used industry, or SIC, dummy variables. However, many studies on diversification and in the strategy field have associated performance effects with relative industry growth rates; hence, an industry variable, measured as the average annual industry growth rate over the period of 1996-98 is included.

RESULTS AND ANALYSIS

Table 3 and Table 4 report the means, standard deviations, and Pearson product-moment correlations among the variables used in the analysis. The correlation data provide a first check to determine if multicollinearity is a problem. Some of the dependent variables do exhibit some level of correlation but this is not considered a problem, as these two dependent variables are not measured in a model together. The rather high correlations between some of the performance measures are also to be expected and, hence, can be termed naturally occurring ecological correlations that are not likely to bias findings (for ROA and ROE, r = 0.511). Inter-correlations among the full set of predictor variables were sufficiently low to preclude the generation of unstable beta coefficients in regression analysis.

The regression results are shown in Table 5 through Table 8. all the regression equations explain, at most, only a part of MNE profitability. However, considering the small number of variables included in the equations as compared to the vast number of factors that influence firm profitability, low adjusted R-squares are to be expected.

ROA Results

Table 5 presents the results of the test for a curvilinear relationship and interaction effects between degree of internationalization (DOI) and performance (ROA). FSTS as a measure of DOI in model 1 and model 2 has been applied to test the curvilinear relationship and country scope has been applied in model 3 and model 4. In model 5, the interaction effects of FSTS and country scope are examined.

The results from model 1 and model 2 provide no evidence of a curvilinear relationship between the degree of internationalization, measured as FSTS, and performance (ROA). Moreover, even though F-values are significant, the adjusted R-Squares in model 1 and model 2 are extremely low. A positive linear relationship between degree of internationalization and performance (ROA) is confirmed.

A straightforward result can be observed from models 3 and 4, when country scope is used as a measure of the degree of internationalization. Both F-values are statistically significant at the 1 percent level, and the adjusted R-square of model 4 is more than two times that of model 3. A curvilinear relationship between country scope and performance is confirmed.

In model 3, there is a statistically significant and positive relationship between DOI, measured by country scope, and ROA. After adding country scope squared in model 4, a negative and significant relationship between country scope squared item and ROA is observed.

Both findings suggest an inverted U-shaped, curvilinear relationship between DOI and ROA. That suggests MNEs enjoy a benefit of initial overseas expansion and the relationship between DOI and ROA is positive. However, at high levels of geographic expansion, the benefit is decreased by the increasing costs of managing an MNE with higher DOI. In other words, the relationship is initially positive and after reaching a critical point, the relationship becomes negative. This inverted U-shaped finding is consistent with previous research by Hitt, Hoskisson, & Kim (1997) and Gomes & Ramaswamy (1999).

Model 5 shows the interaction effects of FSTS and country scope on ROA performance. In model 1 and model 3, we found both FSTS and country scope to be significantly (P

The effect of R&D on ROA is positive in all the five models and two out of five models are statistically significant. This is likely due to R&D expenses not contributing an immediate benefit to firms. Firm size is positively related to ROA in all five models, but only two of five are significant. Industry effect is positively related to ROA in all five models but not at a statistically significant level.

ROE Results

Table 6 presents the results of tests for a curvilinear relationship and interaction effects between degree of internationalization (DOI) and performance (ROE). FSTS is used as a measure of DOI in model 6 and model 7, and has been applied to test the curvilinear relationship and applied country scope in model 8 and model 9. In model 10, the interaction effect of FSTS and country scope is examined.

The results from model 6 and model 7 provide no evidence of a curvilinear relationship between the degree of internationalization, measured as FSTS, and performance (ROE). Moreover, F-values were significant, but both the F-value and adjusted R-Square decreased from model 6 to model 7. A positive linear relationship between degree of internationalization and performance (ROE) was confirmed.

A straightforward result can be observed from model 8 and model 9, when country scope is used as a measure of the degree of internationalization. Both F-values are statistically significant at the 1 percent level, and the adjusted R-squares of model 9 are close to four times that of model 8. A curvilinear relationship between country scope and performance is confirmed. In model 8, there is a statistically significant and positive relationship between DOI, measured by country scope, and ROE. After adding country scope squared in model 9, a negative and significant relationship between country scope squared item and ROE is observed.

Both findings suggest a curvilinear relationship and denote an inverted U-shaped relationship between DOI and ROE. That means, in short, MNEs enjoy the benefit of overseas expansion and the relationship between DOI and ROE is positive. However, at higher levels of expansion, benefits will be decreased by the increasing costs of managing an MNE with higher DOI. In other words, the relationship is initially positive and after reaching a critical point, the relationship becomes negative. Again, this inverted U-shaped finding supports the previous research by Hitt, Hoskisson, & Kim (1997) and Gomes &Ramaswamy(1999).

Model 10 shows the interaction effects of FSTS and country scope on ROE performance. In model 6 and model 8, both FSTS and country scope are significantly (P

Although the coefficient of the interaction term is strongly significant, the coefficients of FSTS and country scope both decrease in magnitude while the F-value and adjusted Rsquared both become worse. No interaction effect can be concluded.

The effect of R&D on ROE is negative in all the five models and three out of five models are with statistical significance. This finding is totally different from what was found in Table 5, and does not support the concept of ownership advantages of FDI theories. The effect of industry, measured by growth, is not consistent across the five models.

Profit Margin Results

Table 7 presents the results of tests for a curvilinear relationship and interaction effects between degree of internationalization (DOI) and performance (Profit Margin). FSTS is used as a measure of DOI in model 11 and model 12 and country scope has been applied in model 13 and model 14. In model 15, the interaction effects of FSTS and country scope are examined.

The results from model 11 and model 12 provide no evidence of curvilinearity in the relationship between the degree of internationalization, measured as FSTS, and performance (Profit Margin). Moreover, even though F-values are significant, both the F-value and adjusted R-Square decrease from model 11 to model 12. A positive linear relationship between degree of internationalization and performance (Profit Margin) was confirmed.

The results from model 13 and model 14 provide no evidence of a curvilinear relationship between the degree of internationalization, measured as country scope, and performance (Profit Margin). Again, even though F-values are significant, both the F-value and adjusted R-Square decrease from model 13 to model 14. A positive linear relationship between degree of internationalization and performance (Profit Margin) was confirmed.

Model 15 shows the interaction effects of FSTS and country scope on Profit Margin performance. In model 11 and model 13, both FSTS and country scope are not significantly correlated with performance. In model 15, country scope is treated as a moderating variable. When the two measures of DOI were considered together, with the interaction term, it was observed that none of the three items-namely FSTS, country scope, and interaction item-were significant. A significant direct effect from the regression of performance on the interaction of FSTS and country scope cannot be confirmed. Moreover, although the coefficients of FSTS and country scope both increase in magnitude, F-value and adjusted R-squared both become worse. No interaction effect can be concluded.

Three very important findings can be concluded from models 11 though 15. First, there is no curvilinear relationship between degree of internationalization and Profit Margin. The positive linear relationship means an internationalization threshold effect does not exist when we apply Profit Margin as a measure of performance. second, the R&D effect is strongly significant and related to Profit Margin. The positive direction also confirms the effects of ownership advantage of multinational companies. Third, industry effect is strongly significant related to Profit Margin across all five models. The negative direction reveals the fact that Profit Margin is negatively related to the average industry growth rate. That means corporations in industries with higher than average growth rates might suffer from lower profit margins.

Total Asset Turnover Results

Table 8 presents the results of tests for a curvilinear relationship between internationalization and performance (Total Asset Turnover). Models 16 and 17 use FSTS as a measure of DOI to test the curvilinear relationship, while models 18 and 19 use country scope. Also shown in Table 8 is a test of whether performance is influenced by an interaction variable created from the interaction of two separate internationalization measures (FSTS and Country Scope). In model 20, the effect on performance of the interaction of FSTS and country scope is examined.

The results from model 16 and model 20 provide evidence consistent with the suggestion that the degree of internationalization, measured as FSTS, is not linearly related to Total Asset Turnover, but curvilinear. Again, comparison of F-values and R-Squares in model 16 and model 17 indicates that results improve when the squared variable was added in model 2; the F-value changed from non-significant to statistically significant at the 10 percent level.

In model 16, FSTS is positively related to Total Asset Turnover. After adding FSTS squared in model 17, the coefficient for FSTS is significant and negative while the coefficient on FSTS squared item is significant and positive. This finding suggests that higher FSTS is positively related to firm performance, at least after some minimum level of foreign involvement. In other words, DOI initially has a negative impact on firm performance and then, as a firm continues to expand internationally, the impact becomes positive. Thus, one can conclude that the relationship between DOI, measured by FSTS, and total asset turnover is standard U-shaped.

A different result can be observed from model 18 and model 19. When country scope is used as a measure of the degree of internationalization, the F-value changed from non-significant to significant at 10 percent level and the adjusted R-square of model 19 is close to two times that of model 18. A curvilinear relationship between county scope and performance is confirmed. In model 18, there is a statistically non-significant and positive relationship between DOI, measured by country scope, and total asset turnover.

After adding country scope squared in model 19, a negative and significant relationship between country scope squared and Total Asset Turnover is observed. Both findings suggest a curvilinear relationship and denote an inverted U-shaped relationship between DOI and Total Asset Turnover. That means, in the short term, MNEs enjoy the benefit of overseas expansion and the relationship between DOI and Total Asset Turnover is positive. However, in the long term, the benefit will be decreased by the increasing costs of managing a MNE with higher DOI. In other words, the relationship is initially positive and, after reaching a critical point, the relationship becomes negative. This inverted U-shaped finding supports the previous research by Hitt, Hoskisson, & Kim (1997) and Gomes & Ramaswamy (1999).

Model 20 shows the interaction effects of FSTS and country scope on Total Asset Turnover performance. In model 16 and model 18, both FSTS and country scope are not significantly correlated with performance. In model 20, country scope is treated as a moderating variable. When the two measures of DOI were considered together, with the interaction term, it is observed that none of the three items, namely FSTS, country scope, and interaction item, is significant. A significant direct effect from the regression of performance on the interaction of FSTS and country scope cannot be confirmed. No interaction effect can be concluded.

The effect of R&D on Total Asset Turnover is negative in all five models, and all five models are with statistical significance.

CONCLUSIONS AND IMPLICATIONS

A summary of all statistical results is presented in Table 9. The results provide some support for Hypotheses 1, 2, and 4, concerning the relationship between internationalization and, respectively, ROE, ROA, and Total Asset Turnover. Support is not found, however, for a relationship between internationalization and Profit Margin, as predicted by Hypothesis 3.

Table 10 reports the findings in the DuPont analysis format. This shows that there are different paths by which an MNE can gain a return for its owners (margin, volume, and leverage), and that problems may result from weakness in any or all of the components.

Our findings regarding ROE and ROA, using a newer set of data than that .used in previous research, are consistent with our hypotheses, and with the work of Rumelt (1974), Daniels and Bracker (1989), Geringer, Beamish and daCosta (1989), Sullivan (1994), Ramaswamy (1995), Al-Obaidan and Scully (1995), and Gomes and Ramaswamy (1999). Overall, we find empirical support for an inverted U-shaped relationship between performance and internationalization. The findings are particularly supportive when internationalization is measured by country scope, and moderately supportive when measured by FSTS. On a practical level, our results suggest that managers should be eager to pursue new international opportunities, but should be wary of over-expanding, or overextending, their firms-particularly geographically.

Regarding the decomposition of ROE and ROA down to the levels of Profit Margin and Total Asset Turnover, our work is new and adds detail to our knowledge of the internationalization-performance relationship. Profit Margin is the pure profitability ratio while Total Asset Turnover is an efficiency ratio. Important conclusions can be inferred from our findings regarding these two constructs. Even though a .05 level of significance is not observed in the relationship between Profit Margin and internationalization (measured by FSTS and country scope), we do find a positively linear slope in both cases. Based on the theoretical foundation for the advantages of internationalization, many international business scholars have concluded that a firm’s performance is expected to improve with the increase in the level of foreign involvement. Theories that support diversification into international markets propose reduced risk of bankruptcy and increased sales and, in turn a higher accrued value to the firm. Our Profit Margin findings do not contradict this existing research.

From the perspective of Total Asset Turnover, our findings suggest both advantages and disadvantages to internationalization. Geographical diversification appears to lead to increased asset turnover (better performance) up to a point-beyond which the performance declines due, presumably, to organizational costs and complexity associated with managing widely scattered operations. The finding from Total Asset Turnover as an efficiency ratio reveals that performance increases as strategic resources are leveraged across national borders, and falls off as the scope of internationalization exceeds the range of these resources. The efficiency of asset management should be a primary concern of multinational corporations, and, again, we would caution managers to be alert for international expansion opportunities, but to be wary of geographic over expansion.

In summary, the evidence suggests that the advantages of internationalization are greater than the disadvantages at lower levels of internationalization, while the multinational corporation can efficiently manage its resources. At higher degrees of internationalization, however, the advantages are offset by the disadvantages of managerial constraints and resources limits, or the problems of efficiently managing the resources.

While this study provides a valuable new perspective on the question of the internationalizationperformance relationship, one word of caution is merited in relation to our empirical findings. Our results are based on two years of financial data. Given that there exists no fixed agreement on an appropriate time frame for measuring financial performance, one should recognize that a two-year time frame might alternatively be considered a long, short, or appropriate time frame.

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Chin-Chun Hsu, University of Nevada, Las Vegas (UNLV)

David J. Boggs, Saint Louis University

Dr. Chin-Chun Hsu is an Assistant Professor of Management at the University of Nevada, Las Vegas. His research interests include internationalization strategy and performance, and cross-cultural management. Email: vincent.hsu@ccmail.nevada.edu

Dr. David J. Boggs is an Assistant Professor of International Business at Saint Louis University. His research interests include foreign direct investment theory and policy, global strategy, and international business ethics. Email: boggsdj@slu.edu

The authors wish to thank the MBR anonymous reviewers for their helpful comments. An earlier version of this paper was presented at the Academy of International Business 2001 Annual Meeting held in Sydney, Australia, from November 16-19, 2001

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