Lecture 2: Growth versus survival in international markets
Lu, J.W., & Beamish, P.W. (2004). International diversification and firm performance: The S-Curve
hypothesis.
What is the topic of this study?
Firms are diversifying the geographic scope of their business activities in the pursuit of competitive
advantage. In this study, we addressed the relationship between multinationality and firm performance.
What are the findings in this study?
We found that the returns from a geographic diversification strategy were related to costs and benefits
that varied depending on the extent of a firm’s internationalization. Firms with strong technology or
advertising asset advantages achieved higher returns to geographic expansion.
Research aim*
Synthesize prior studies on geographic diversification and performance
Develop a theoretical framework integrating asset-based internalization advantages with other internationalization
costs/benefits across time
Explore how internationalization motives (i.e. intangible assets) affect the performance implications of a
geographic diversification strategy.
Empirically test the theoretical model with longitudinal data comprising 1489se firms and their internationalization
activities.
What is the research gap this paper is trying to close? *
Our review of the literature suggested that conflicting results could be an outcome of incomplete
theorization about the full range of benefits and costs, and about the changes in these benefits and costs
over the time it takes to fully implement an internationalization strategy this research makes a more
complete framework.
The research question is: What is (which form takes) the relationship between multinationality and firm
performance?
Describe the approach the author’s took?
They developed a theoretical framework providing a more complete account of benefits and costs of
internationalization as well as theory on how the benefits and costs change across stages of international
expansion.
,Theoretical framework*
Describe the process of the horizontal S-Curve
This association was manifested in a horizontal S-Curve which showed a performance decline with
increasing internationalization, followed by a positive relationship between increasing geographic
diversification and firm performance, which then declined at very high levels of multinationality.
What are the benefits of Geographic diversification?
Reduce fluctuations in revenue by spreading its investment risks over different countries
Helps reduce costs and increase revenues by increasing a firm’s market power over it’s suppliers,
distributors, and customers
Lowers costs by enabling arbitrage of differences in input and output markets
Real benefit: the opportunity to exploit market imperfections in the cross-border use of its intangible assets
(firm can gain above-normal returns by exploiting its firm-specific assets).
What are the costs related to geographic diversification?
1) Liabilities of newness
a. Firms managers are confronted with a lot of challenges related to new operations (such as purchasing
and installing facilities, staffing, and establishing internal management systems and external business
networks).
b. Challenges can put new subsidiaries in disadvantageous positions and can decrease their
competitiveness.
c. Decrease reputations and legitimacy in the host country
2) Liability of foreigness:
a. Describes the difficulties to new subsidiaries established in foreign countries
b. Can lead to higher costs because the firm cannot conduct business activities as effectively as local firms
c. Mistakes in various business decisions are more likely
3) General disadvantages
a. Transaction and coordination costs increase with the degree of geographic diversification
b. Coordination difficulties
, c. Information asymmetry
d. Incentive misalignment
e. High governance costs
Describe and name the three distinct phases in the relationship between internationalization and
performance
Phase 1: A firm encounters liabilities of newness and foreigness in which it must pay some “tuition” in
the form of reduced profits resulting from disadvantages.
Given that firms at early stages of international expansion are generally young, small, and likely to have
low product diversification. This costs could outweigh the benefits of internationalization, extending
the time until net positive performance outcomes of internationalization can be realized.
Phase 2: Increasing levels of geographic scope are associated with growth in a firm’s profitability.
Starting point for phase 2 is the increasing international expansion, experiential learning about how to
establish a subsidiary effectively in a host country, which reduces the costs associated with being new
and foreign.
Furthermore, growing geographic diversification enables asset advantages to be exploited across greater
spread of markets, that occurs alongside the development of new capabilities in international markets.
Phase 3: Even though the costs related to newness and foreigness are being reduced, the costs of
governance and coordination begin to rise. These costs escalate to the point where costs can again
surpass the benefits of geographic diversification and firm performance declines.
What are the hypothesis in this paper?
Hyp. 1: The relationship between geographic diversification and firm performance is nonlinear, with the
slope negative at low levels of geographic diversification, positive at medium levels of geographic
diversification, and negative at high levels of geographic diversification.
Hyp. 2: A firm’s intangible assets moderate the relationship between geographic diversification and firm
performance in such a way that high levels of intangible assets increase the performance gains
attributable to geographic diversification.
Name the methods used in this paper
The authors examined the foreign expansions of Japanese firms and chose Japan because the companies
in this country required a sample of firms at various stages of international expansion.
What are the results in this paper?
Hyp. 1: This hypotheses was strongly supported. Firm performance was negatively related to the linear
term of internationalization, positively related to the square term of internationalization, and then
negatively related to the cubic term of internationalization.
Hyp. 2: This hypotheses was partially supported. It is important to note that the “main effect” between
internationalization and performance remained robust in all the models when the interaction terms
were included.
, What is the moderating influence of a firm’s intangible assets in H2?*
IA positively moderate the exploitation benefits of a firm’s internationalization strategy
IA: technological know-how, patents, management skills, brands, goodwill, etc
International transactions of IA need to be internalized (otherwise market failure, e.g. opportunism)
Development of IA requires considerable resources, BUT an IA’s value does not depreciate when used in
different (international markets.
Firms with more IA generate higher returns from their FDI by realizing scale and scope economies in
the exploitation of their IA.
What is a moderator analysis?
A categorical or metric variable that affects the direction and/or strength of the relation between an
independent variable and a dependent variable.
What are the findings in this paper?
The paper examined the nature of the relationship between geographic diversification and firm
performance at different phases of internationalization, across firms with different assets.
The author’s found out that:
Geographic diversification had a nonlinear relationship with performance
Negative association with performance and geographic diversification (high and low levels of
internationalization)
Greater diversity was accompanied by higher performance at moderate levels
The horizontal S-Shaped relationship between geographic diversification and performance provides a basis
for resolving the inconsistency of empirical results.
Firms with more intangible assets generate higher returns from their FDI by realizing scale and scope
economies in the exploitation of their IA.
Name the practical implications the authors offered managers
Managers need to take a long-term view of internationalization and be resolute during early stages of
international expansion.
Managers need to be cognizant of the potential downside of excessive international expansion and to be
proactive in the design and implementation of international strategies by optimizing the configuration of
subsidiary networks to keep the scope of internationalization activities at an optimal level.
Managers can extend the peak of performance encountered in phase 2 and move the threshold of
internationalization to a higher level/.
Managers should learn to adjust organizational structures and systems to handle the identified coordination
problems.
Managers should not underestimate the importance of intangible assets.
Lu, J.W., & Beamish, P.W. (2004). International diversification and firm performance: The S-Curve
hypothesis.
What is the topic of this study?
Firms are diversifying the geographic scope of their business activities in the pursuit of competitive
advantage. In this study, we addressed the relationship between multinationality and firm performance.
What are the findings in this study?
We found that the returns from a geographic diversification strategy were related to costs and benefits
that varied depending on the extent of a firm’s internationalization. Firms with strong technology or
advertising asset advantages achieved higher returns to geographic expansion.
Research aim*
Synthesize prior studies on geographic diversification and performance
Develop a theoretical framework integrating asset-based internalization advantages with other internationalization
costs/benefits across time
Explore how internationalization motives (i.e. intangible assets) affect the performance implications of a
geographic diversification strategy.
Empirically test the theoretical model with longitudinal data comprising 1489se firms and their internationalization
activities.
What is the research gap this paper is trying to close? *
Our review of the literature suggested that conflicting results could be an outcome of incomplete
theorization about the full range of benefits and costs, and about the changes in these benefits and costs
over the time it takes to fully implement an internationalization strategy this research makes a more
complete framework.
The research question is: What is (which form takes) the relationship between multinationality and firm
performance?
Describe the approach the author’s took?
They developed a theoretical framework providing a more complete account of benefits and costs of
internationalization as well as theory on how the benefits and costs change across stages of international
expansion.
,Theoretical framework*
Describe the process of the horizontal S-Curve
This association was manifested in a horizontal S-Curve which showed a performance decline with
increasing internationalization, followed by a positive relationship between increasing geographic
diversification and firm performance, which then declined at very high levels of multinationality.
What are the benefits of Geographic diversification?
Reduce fluctuations in revenue by spreading its investment risks over different countries
Helps reduce costs and increase revenues by increasing a firm’s market power over it’s suppliers,
distributors, and customers
Lowers costs by enabling arbitrage of differences in input and output markets
Real benefit: the opportunity to exploit market imperfections in the cross-border use of its intangible assets
(firm can gain above-normal returns by exploiting its firm-specific assets).
What are the costs related to geographic diversification?
1) Liabilities of newness
a. Firms managers are confronted with a lot of challenges related to new operations (such as purchasing
and installing facilities, staffing, and establishing internal management systems and external business
networks).
b. Challenges can put new subsidiaries in disadvantageous positions and can decrease their
competitiveness.
c. Decrease reputations and legitimacy in the host country
2) Liability of foreigness:
a. Describes the difficulties to new subsidiaries established in foreign countries
b. Can lead to higher costs because the firm cannot conduct business activities as effectively as local firms
c. Mistakes in various business decisions are more likely
3) General disadvantages
a. Transaction and coordination costs increase with the degree of geographic diversification
b. Coordination difficulties
, c. Information asymmetry
d. Incentive misalignment
e. High governance costs
Describe and name the three distinct phases in the relationship between internationalization and
performance
Phase 1: A firm encounters liabilities of newness and foreigness in which it must pay some “tuition” in
the form of reduced profits resulting from disadvantages.
Given that firms at early stages of international expansion are generally young, small, and likely to have
low product diversification. This costs could outweigh the benefits of internationalization, extending
the time until net positive performance outcomes of internationalization can be realized.
Phase 2: Increasing levels of geographic scope are associated with growth in a firm’s profitability.
Starting point for phase 2 is the increasing international expansion, experiential learning about how to
establish a subsidiary effectively in a host country, which reduces the costs associated with being new
and foreign.
Furthermore, growing geographic diversification enables asset advantages to be exploited across greater
spread of markets, that occurs alongside the development of new capabilities in international markets.
Phase 3: Even though the costs related to newness and foreigness are being reduced, the costs of
governance and coordination begin to rise. These costs escalate to the point where costs can again
surpass the benefits of geographic diversification and firm performance declines.
What are the hypothesis in this paper?
Hyp. 1: The relationship between geographic diversification and firm performance is nonlinear, with the
slope negative at low levels of geographic diversification, positive at medium levels of geographic
diversification, and negative at high levels of geographic diversification.
Hyp. 2: A firm’s intangible assets moderate the relationship between geographic diversification and firm
performance in such a way that high levels of intangible assets increase the performance gains
attributable to geographic diversification.
Name the methods used in this paper
The authors examined the foreign expansions of Japanese firms and chose Japan because the companies
in this country required a sample of firms at various stages of international expansion.
What are the results in this paper?
Hyp. 1: This hypotheses was strongly supported. Firm performance was negatively related to the linear
term of internationalization, positively related to the square term of internationalization, and then
negatively related to the cubic term of internationalization.
Hyp. 2: This hypotheses was partially supported. It is important to note that the “main effect” between
internationalization and performance remained robust in all the models when the interaction terms
were included.
, What is the moderating influence of a firm’s intangible assets in H2?*
IA positively moderate the exploitation benefits of a firm’s internationalization strategy
IA: technological know-how, patents, management skills, brands, goodwill, etc
International transactions of IA need to be internalized (otherwise market failure, e.g. opportunism)
Development of IA requires considerable resources, BUT an IA’s value does not depreciate when used in
different (international markets.
Firms with more IA generate higher returns from their FDI by realizing scale and scope economies in
the exploitation of their IA.
What is a moderator analysis?
A categorical or metric variable that affects the direction and/or strength of the relation between an
independent variable and a dependent variable.
What are the findings in this paper?
The paper examined the nature of the relationship between geographic diversification and firm
performance at different phases of internationalization, across firms with different assets.
The author’s found out that:
Geographic diversification had a nonlinear relationship with performance
Negative association with performance and geographic diversification (high and low levels of
internationalization)
Greater diversity was accompanied by higher performance at moderate levels
The horizontal S-Shaped relationship between geographic diversification and performance provides a basis
for resolving the inconsistency of empirical results.
Firms with more intangible assets generate higher returns from their FDI by realizing scale and scope
economies in the exploitation of their IA.
Name the practical implications the authors offered managers
Managers need to take a long-term view of internationalization and be resolute during early stages of
international expansion.
Managers need to be cognizant of the potential downside of excessive international expansion and to be
proactive in the design and implementation of international strategies by optimizing the configuration of
subsidiary networks to keep the scope of internationalization activities at an optimal level.
Managers can extend the peak of performance encountered in phase 2 and move the threshold of
internationalization to a higher level/.
Managers should learn to adjust organizational structures and systems to handle the identified coordination
problems.
Managers should not underestimate the importance of intangible assets.
