The effect of technological advance on the scale and scope of MNE’s internationalization: the moderating role of industry dynamism and economic policy integration

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The effect of technological advance on the scale and scope of

MNE’s internationalization: the moderating role of industry

dynamism and economic policy integration

Dovilė Šarkaitė

10531971

30th_{June 2014}

MSc Business Studies: International Management Final Version Master Thesis

Supervisor: Dr. Niccolò Pisani Second Reader: Dr. Suzana Rodrigues

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Abstract

This master thesis analyzed the relationship between technological advance and both scale and scope of internationalization of multinational enterprises (MNEs), while taking into account the moderating effects of industry dynamism and economic policy integration of the home-country region. Focusing on multinational enterprises, which have reported expenses on research and development for the fiscal year 2012 from Fortune Global 500 list, it has been found that technological advance has more explanatory power on analyzing domestic versus international business orientation of MNEs with less explanatory power in case of regional versus global business expansion. Nevertheless, the positive nonlinear relationship has been confirmed in both cases, with the slope greater at low levels of technological advance. Furthermore, industry and home-country specific factors have been proven to be significant when explaining the relationship between technological advance and scope of internationalization of MNEs. The present research proved to be of academic relevance by filling the gap in the existing literature on internationalization level of MNEs concerning the relationship between technological advance and both scale and scope of internationalization of MNEs, additionally testing two moderating effects. The findings of this thesis also have managerial relevance and can be useful when making strategic decisions on international expansion possibilities in multinational corporations.

Keywords: Technological Advance; Scale of Internationalization; Scope of Internationalization; Multinational Enterprise; Industry Dynamism; Economic Policy Integration

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1 Introduction

Multinational enterprises (MNEs) play significant role in the global economy. Over years of international management research, studies have analyzed many factors and characteristics shaping MNEs’ success of international expansion. Globalizing business environment not only encourages starting business abroad and exploring foreign markets, but also leads to more fierce competition among companies in order to sustain their competitive advantage. Technological advance, defined as the ability to develop and exploit technological know-how after being embodied in firm’s products and processes (Cuervo-Cazurra and Un, 2007), is considered to be an extremely valuable intangible asset which helps to overcome liability of foreignness in MNEs’ internationalization process, defined by Elango (2004) as the degree to which a firm’s sales revenue or operations originate from outside its home region.

Existing academic literature has already confirmed the effect of technological advance on performance and degree of internationalization of MNEs. Yet, deeper analysis in this research area needs to be done in order to find out the strength of the existing relationship between technological advance and internationalization of MNEs, as well as to define possible factors shaping this relationship. First of all, it is interesting to find out how different the effect of technological advance is on both scale and scope of internationalization, more specifically than concentrating only on international versus domestic business orientation as it has been done in the majority of existing studies (Elango, 2004; Rugman and Verbeke, 2004; Banalieva and Dhanaraj, 2013). Most recent research is exclusively focused on the regionalization process rather than the overall internationalization of MNEs, claiming that only few companies choose to expand globally, while the rest limit their international activities within their home region (e.g. Rugman and Verbeke, 2004; Li, 2005; Cerrato, 2009; Banalieva et al., 2012; Banalieva and Dhanaraj, 2013). Furthermore, only few studies

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concentrate specifically on effect of technological advance on internationalization level of MNEs (Cerrato, 2009) not investigating the particular shape of such relationship. This thesis assumes that the relationship is nonlinear with decreasing importance of technological advance when higher scale and scope of internationalization of MNEs are achieved.

This generates another question about what are the moderating factors that influence companies’ international expansion choice if all companies could go global by increasing investments in innovation. Two factors – industry dynamism and economic policy integration of home region of MNE – are hypothesized to moderate the relationship between technological advance and internationalization process. These two moderators are assumed to have effect on the relationship of technological advance and both scale and scope of internationalization since needless to say, different industries offer different potentials for companies’ expansion to foreign markets. Higher economic policy integration level makes easier to overcome potential business barriers while expanding operations.

Stated otherwise, this thesis focuses on the crucial relationship between technological advance and both scale and scope of MNEs’ internationalization. Moreover, the specific moderating effects of industry dynamism and economic policy integration are investigated in the present study. Thus, this study contributes to international business research with shedding more light on the significance of technological advance on internationalization level of MNEs. Furthermore, the outcome of the study can be beneficial on managerial decisions in the multinational companies.

This thesis consists of four parts. First of all, in the following section the existing literature will be discussed in order to introduce definitions and relevant findings related to the topic. Later on, the expected relationship between technological advance and internationalization level of the company together with moderating effects will be identified in the stage of hypotheses development. Subsequently, data collection, formed variables and

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the performed analysis will be presented in methods section. The outcome and academic interpretation of statistical analysis will be explained in the results section. Concluding part of the thesis will consist of the limitations of this research and suggestions for possible future research.

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2 Literature review

2.1 Technological advance

Technological advance refers to the proprietary knowledge developed by a firm through research and development (R&D) activities and embodied in the firm’s processes and products (Banalieva and Dhanaraj, 2013). In the academic literature technological advance is also identified as innovation or technology in general (Hitt et al., 1997; Nachum and Zaheer, 2005), technological knowledge (Hashai and Almor, 2008), but most common naming is research and development investments or research and development intensity, since it is measured by R&D expenditures in the vast majority of cases (Franko, 1989; Kotabe et al., 2002; Cuervo-Cazurra and Un, 2007; Lee and Marvel; 2009; Mudambi and Swift, 2014). Current international business research states that regular R&D investments enable firms to develop sustainable competitive advantage (Kotabe et al., 2002; Cerrato, 2009).

R&D investments are important for generating knowledge, which can help the firm to achieve an advantage that is difficult to replicate by competitors as noted by Cuervo-Cazurra and Un (2007). Hashai and Amor (2008) support previous study by suggesting that investments in R&D enable the creation of specific technological knowledge. Both statements are in line with the resource based view (Barney, 1991; Peteraf, 1993) stating that the enjoyment of unique and difficult to imitate specific technological knowledge is a source of sustainable competitive advantage. Kotabe (1990a) explains this more in detail, arguing that companies can improve their performance by focusing on product design or development and by improving their manufacturing processes. Such investments in product or process development differentiate a company from competitors’, which leads to achieving and sustaining competitive advantage. Furthermore, technological advance in manufacturing processes can lower production costs and improve product quality compared to competitors.

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Kotabe et al. (2002) add that innovativeness, as reverberated in research and development investments, allow firms to achieve greater efficiency in their operations. This becomes important when they expand since they can either charge premium prices for their innovative products or further lower production costs by applying their manufacturing processes and achieving economies of scale (Porter, 1986 in Kotabe et al., 2002). Later research by Mudambi and Swift (2012) confirms that investments in innovation are beneficial for a firm and are encouraged to be increased in order to sustain competitive advantage since over time competitors are able to imitate leading companies, which makes earlier products and processes obsolete.

Looking from international business perspective Eriksson et al. (1997) state that product and process innovations may help firms not only improve their competitiveness at home, but as well use opportunities contained by foreign markets. Later study of Kotabe et al. (2002) draws a notice from the resource-based view that suggests internal capabilities allow firms to achieve differential advantages of internationalization. Cerrato (2009) adds that technology firm-specific advantages (FSAs) have greater geographical reach and are therefore more likely to drive MNEs towards a global orientation. The author illustrates that technology FSAs are less location-bound, so it reduces the liability of regional foreignness, which is always taken into account in international expansion process of companies.

From the literature there is clear evidence that innovation plays an important role in fostering MNEs performance. High degrees of R&D intensity indicate the presence of intangible assets that lead to competitive advantage in international markets (Kirca et al., 2012). There is also a strong agreement around the notion that innovation intensity level influences the internationalization degree of MNEs. Filatotchev and Piesse (2009) say that internationalization, among other factors, may be driven by the firm’s efforts to leverage its capability in organizational learning and innovation. The study of Li (2008) shows that a

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firm’s R&D intensity does not only contribute directly to the effectiveness of its business systems but also soften the effect of the firm’s “liability of internationalization” and extend its effective period of international expansion. Finally Cerrato (2009) and later Banalieva and Dhanaraj (2013) agree that technology confers competitive advantage for a firm to access global markets and overcome the challenges of increasing distance from the home market. More detailed explanation of the technological advance effect on internationalization level of MNEs will be provided in a later chapter of this work when developing theoretical framework.

2.2 Scale and scope of MNEs’ internationalization

Multinational enterprises (MNEs) are traditionally thought of as successful firms that have grown over many years into large corporations that are international in their operations, vision and strategies (Aggarwal et al., 2011). There has been an implicit assumption that firms expand globally, accelerated by growing technology, transportation, and trade links across the world (Banalieva and Dhanaraj, 2013). Similar explanation why firms are increasingly spreading internationally is given in Osegowitsch and Sammartino (2008) study saying that differences across countries and across regions – as conceived in terms of cultural, institutional and economic “distance” – may diminish over time through factors such as new technologies, trade and FDI agreements and the emerging global mass media. When discussing MNE, internationalization also known as multinationality generally refers to the extent to which firms operate beyond their national borders and benefit from product and geographical diversifications through economies of scale and scope (Kotabe et al., 2002). According Prange and Verdier (2011) the internationalization process depicts the path a firm decides to follow in order to seize worldwide opportunities.

Competition in local market combined with the target of business and profit growth raise necessity for firms to find international markets for their products and services as well

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as configure their value chain activities around the globe in order to achieve scale, learning and location economies – in essence, to increase their multinationality (Kotabe et al., 2002). Elango (2004) states that internationalization of MNE opens wide opportunities, which consist of market opportunities, economies of scale and scope, factor advantages, exploiting distinctive capabilities, flexibility, risk reduction as well as many other competitive benefits – closing entry by rivals and avoiding intense competition in home markets. The degree of firm internationalization is a key dimension that spans all theoretical frameworks, levels of empirical analysis and domains of investigation in international business research (Aggarwal et al., 2011). It is difficult to indicate the optimal level of internationalization and determine whether MNEs should limit their operations within their home region when expanding internationally or they should go global. In this case it is essential to distinguish between scale and scope of internationalization of MNEs. Scale of internationalization captures company’s domestic versus international orientation and scope of internationalization indicates regional versus global business strategy, indicating the choice of companies to expand within home-region only or doing business worldwide. There are two different views in the international business literature on the question, whether MNEs should limit their operation within home region or expand to foreign regions as well.

In the early research of international business Johanson and Vahlne (1977) introduce the internationalization model, which assumes that MNEs internationalize incrementally from familiar and proximate to new distance locations, increasing their commitment to foreign locations in small steps as they learn about these new markets. After deeper research in the internationalization process of MNEs it was found that majority of MNEs tend to be more regional, limiting their activity scope to their home region (Gemawat, 2003; Rugman and Verbeke, 2004; Aggarwal et al., 2011; Banalieva et al., 2012). The logic of the internationalization model states that MNEs start with home region orientation and gradually

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adapts their international expansion to more distant geographic locations. On the other hand, international business research argues that limiting operations to home region has many advantages and not necessarily all companies have a need of global expansion (Oh, 2009). In contrast, Richter (2007) agrees that regional activities prevent a firm from suffering heavy performance decreases during initial international expansion but that the regional activities impede the firm when attempting to exploit all of potential international benefits (Oh, 2009).

Transaction cost economic perspective of regionalization emphasizes that since transaction costs outside the home region exceed those within the home region, MNEs should benefit by limiting their geographic scope to their home region (Banalieva et al., 2012). These increased transaction costs together with unfamiliar host business environment and home country restrictions on host country operations are commonly referred to as liability of foreignness (Elango, 2004). The consequences of the liability of foreignness are lower performance and increased failure rates (Cuervo-Cazurra et al., 2007). In the same research of Cuervo-Cazurra et al. (2007) liability of expansion is also mentioned, when companies face lack of their resources’ capacity, and liability of newness, which refers to lack of firm’s resources for different competitive environment, as the possible obstacles for international expansion. In line with transaction cost theory, a firm performs better when it operates more in home region rather than in a foreign region, because such firm can reduce liability of foreignness by expanding into its home region (Oh, 2009). The same research adds that geographic closeness makes it easier for MNEs to negotiate and coordinate within the home region, also Cerrato (2009) agrees that the higher psychic distance, the higher the learning costs associated with internationalization. But again, Hennart (2011) argues that firms can perform well at different levels of internationalization, which follows the internationalization model of Johanson and Vahlne (1977). Global diversification can be also associated with risk reduction as distant global markets are less correlated with one another than proximate ones.

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This explains why MNEs pursuing a low home-region oriented strategy are likely to be less affected by a regional economic crisis, as it can readily shift expansion efforts into another, less affected global region, enhancing its overall profitability (Hennart, 2011).

Extant research thus documents that the degree of internationalization of MNEs is distinguished between low level of internationalization, which leads to regional-oriented strategy of MNEs and high level of internationalization, which indicates that MNEs has globally-oriented strategy. Contrary, Gemawat (2003) argues that the distinctive feature of today’s environment is semi-globalization because it is not characterized by neither extreme geographic fragmentation of the world in national markets nor complete integration. Research analyzing the internationalization of the MNEs also uses intermediate degrees of internationalization (Rugman and Verbeke, 2004; Aggarwal et al., 2011). Rugman and Verbeke (2004) have indicated also bi-regional and host-region oriented MNEs, while Aggarwal et al. (2011) additionally take into account domestic and trans-regional companies apart from home-region and global oriented MNEs. Aggarwal et al. (2011) also stress that it is important to approach the common classification system for internationalization level of MNEs in order to be able to compare different studies and to clarify theoretical contributions to this research topic. However, in the literature there is no agreed approach to define and measure firm-level internationalization in one way.

Existing academic literature analyzing the internationalization of MNEs for internationalization degree measurement uses sales-based variables such as foreign sales to total sales (Kotabe et al., 2002; Rugman and Verbeke, 2004; Li, 2005; Cerrato, 2009, Filatotchev and Piesse, 2009) or in order to capture effect of home region measure regional sales (excluding domestic sales) to foreign sales (Hitt et al., 1997; Cerrato, 2009; Banalieva and Dhanaraj, 2012). Gomes and Ramaswamy (1999) state that foreign sales to total sales ratio can be viewed as a proxy for a firm’s dependence on its overseas markets for sales

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revenues. Rugman and Verbeke (2004) add in their study it should be recognized that only sales dispersion constitutes a true performance measure at output level. Banalieva and Dhanaraj (2012) state that analyzing firms’ internationalization degree in other types of foreign strategies such as purchasing or sourcing or using subsidiary data could further enhance the generalizability of existing findings. Using this widely spread sales-based measurements, most of the researchers agree that the majority of large MNEs have most of their total sales in the home region and only few companies are truly global (Rugman and Verbeke, 2004; Banalieva and Dhanaraj, 2012). Contrary, Osegowitsch and Sammartino (2008) argue that admitting only few companies as truly global and majority as only operating in the home-region might be too strict and valuable information is ignored since domestic activity is assigned to home-region sales.

Another interesting study by Aggarwal et al. (2011) can be considered in order to better understand the internationalization level of MNEs. Since none of the ways in existing literature have become a standard to measure the degree of internationalization, they propose to distinguish between breadth and depth of internationalization by using two dimensions, not only sales but also investment in subsidiaries. The ratio of investment in subsidiaries as previous studies is linked to scale based measures of internationalization, but the idea of separating concepts of scale and scope of internationalization of MNEs is worth academic attention and in most recent studies (Cerrato, 2009; Banalieva and Dhanaraj, 2013) it was not emphasized enough. Taking into account not only scale of internationalization while analyzing internationalization processes of MNEs but also scope of internationalization can add new insights to current academic literature. Gomes and Ramaswamy (1999) notice that number of foreign countries in which a firm has subsidiaries captures the dispersion element encompassing locational costs and benefits. It also acknowledges location as fundamental for internationalization of firm (Gemawat, 2003; Nachum and Zaheer, 2005). The scope of

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international activities is important since it also shapes international strategy, foreign market entry type of MNEs as well as affects the culture of human resources (Aggarwal et al., 2011).

To summarize the contributions on defining how multinational MNEs are, it can be stressed that the topic represents a crucial theme in international business research. The lack of standardized internationalization level of MNEs measurement encourages paying more attention to evaluating the importance of not only scale but also scope measurements of internationalization of MNEs. It is thus optimal to consider both scale and scope of internationalization as measures.

2.3 Relationship between technological advance and internationalization of MNEs

As discussed, both the concept of technological advance and the extent of MNEs’ internationalization are widely discussed in international business research. In this section, theoretical and empirical contributions relative to the relationship between technological advance level and internationalization degree of MNEs will be examined.

Extant research documents a positive effect of technological advance on performance up to a certain degree (Gomes and Ramaswamy, 1999; Kotabe et al., 2002; Nachum and Zaheer, 2005; Hennart, 2011), also positive technological advance impact on firms’ performance and technical efficiency (Ecker et al., 2013; Mudambi and Swift, 2014). Furthermore, the most relevant research to this thesis analyzes the relationship between technological advance and internationalization (Cerrato, 2009; Cassiman and Golovko, 2011; Golovko and Valentini, 2011; Banalieva and Dhanaraj, 2013). The studies by Cassiman and Golovko (2011) and Golovko and Valentini (2011) found that the relationship between technological advance and internationalization of small and medium enterprises (SMEs) is positive, in line with Cerrato (2009) research, which indicated positive linear effect of technological advance on internationalization of MNEs. According to mentioned studies, higher technological advance level results in higher degree of internationalization.

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First of all, Cassiman and Golovko (2011) state that innovation is an important factor while explaining the entry into the foreign market, because it favors in the search of greater demand for these products of potentially superior quality. Moreover, investments in innovation enable the firm to achieve greater ability to meet demands of its changing domestic and international markets, thus making business more profitable for a firm (Zahra and Covin, 1994). Another notice is that innovation can increase customers’ willingness to pay by adding or improving product quality (Cho and Pucik, 2005), as well as, it can decrease the cost of operations when expanding abroad. Firms are also able to better benefit from spillovers and are less sensitive to adverse macroeconomic shocks (Geroski et al., 1993). To this extent, Golovko and Valentini (2011) add that continuous innovation has become increasingly important in achieving commercial and economic success in foreign markets.

After his empirical analysis of Italian MNEs, Cerrato (2009) states that technological FSAs are key drivers of internationalization not only when firms go outside their home country, but also when they go beyond their home region. He indicates a linear effect and argues that R&D intensity positively correlates with the proportion of both regional and global sales. But he also distinguishes the different effect of technological advance level one firm being international oriented and global oriented, R&D advantages must be assessed much more carefully when global expansion is concerned. The global exploitation of technology FSAs is constrained by and inter-regional liability of foreignness (Cerrato, 2009). In other words, R&D has high explanatory power on international expansion, but it has much less power to explain global expansion. Another research of Kotabe et al. (2002) concentrate on low versus high level of multinationality, but also agree with Cerrato findings that higher level of R&D intensity leads to higher level of internationalization which influences better firm performance.

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More recent study done by Banalieva and Dhanaraj (2013) analyze home region effect on internationalization and also acknowledges the importance of innovation relative to MNEs internationalization process. Their main statement is that a negative, nonlinear effect of technological advantage within home region on home-region orientation (HRO) exists. As technological advantage increases, productivity of the MNEs’ resources also increases more than proportionately. As technological advantage increases, organizational costs of coordination across markets decrease at an increasing rate, and hence firms would be able to reach more globalized markets rapidly. Concurrently, as the capacity of the firm to penetrate distant markets better at an increasing rate, a firm’s HRO decreases more than proportionately (Banalieva and Dhanaraj, 2013). The results of their empirical study show that the average HRO declines at an increasing rate as technological advantage increases (Banalieva and Dhanaraj, 2013). Such proposition leads to the possibility of new research on technological advantage impact of internationalization of MNEs, suggesting that the relationship between technological advance and internationalization of MNEs is nonlinear.

To sum up, Cerrato (2009) states that the relationship between the two constructs is positive and the dependency is linear. Building on the logic of Banalieva and Dhanaraj (2013) this study aims to prove that the relationship between R&D intensity level and internationalization level is indeed nonlinear. The argumentation for the positive non-linear relationship between technological advance and internationalization of MNEs will be introduced in the following chapter.

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3 Theoretical framework

Figure 1 illustrates the conceptual framework and hypotheses. The development of the theory starts by indicating the innovation intensity effect on scale and scope of internationalization of MNEs, followed by analysis of moderating effects of industry international dynamism and economic policy integration of MNE’s home region.

Figure 1. Visualization of theoretical framework

3.1 Technological advance and scale and scope of internationalization

As it was already mentioned in the literature review section, this study distinguishes between scale and scope of internationalization of MNEs. While scale of internationalization captures domestic versus international operations orientation, scope of internationalization on the other hand is important in order to analyze regional versus global business strategy of MNEs. This master thesis aims to capture the strength of technological advance effect on both scale and scope of internationalization.

Existing academic research recognizes that firms benefit when investing in innovation from both demand and supply sides of their business. It helps to better prepare them for new market entry in order to be able to meet future customers demand as well as decreases the costs of moving their business abroad. It also helps to overcome the so-called liability of

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foreignness (Cerrato, 2009; Cassiman and Golovko, 2011; Banalieva et al., 2012). Liability of foreignness in geographically closer markets is lower because of more similar cultural and economic environment, so it does not require high investments in R&D activities, but at the same time increases scale of internationalization of MNEs. When thinking of business expansion beyond the home region into geographically distant markets due to less familiar business environment technological advance costs can increase significantly. Due to such theoretical contributions, in line with Cerrato’s (2009) study, it is assumed that technological advance increases both scale and scope of internationalization, which explains the positive slope in the relationship between technological advance and scale and scope of internationalization of MNEs.

The empirical analysis by Cerrato (2009) tests only linear effect of technological advance on internationalization of MNEs. Having said that, we hypothesize a nonlinear relationship between technological advance and both scale and scope of internationalization, based on the following reasons. To begin with, research by Banalieva and Dhanaraj (2012) argues that due to technological advance the capacity of the firm to achieve global markets more quickly increases and at the same time HRO decreases. The empirical analysis performed by the researchers proves that for an internationalizing MNE, as technological advantage increases, HRO decreases at an increasing rate (Banalieva and Dhanaraj, 2012). Such empirical findings also encourage questioning the linearity of the relationship between technological advance and internationalization of MNE since home region orientation in business is a central part of internationalization strategy. Secondly, when thinking about possible nonlinearity in the relationship between technological advance and scale and scope of internationalization of MNEs it is again worth to consider the importance of the liability of foreignness when expanding business abroad. When firms move into new market they face different institutional environments, formed by the set of norms and rules that constrain

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human behavior, such as culture, language, religion and the political, legal and economic systems (North, 1990). Investments in technological advance help to reduce the liability of foreignness when expanding internationally but when business operations of MNEs spread to more geographically distant countries the differences in institutional environment increase, which results in possible greater lack in complementary resources, such as understanding, relationships, and social capital needed for dealing with other entities and prevailing rules of behavior (Cuervo-Cazurra et al., 2007). Such greater differences between home and host countries naturally result in significant increase in costs for technological advance in order to overcome additional challenges, which might result in the decrease of importance of technological advance effect on internationalization of MNEs and can explain the greater slope of relationship at low levels of technological advance.

This discussion of the components possibly influencing the shape of relationship between the technological advance and both scale and scope of internationalization can be summarized in following hypotheses:

Hypothesis 1. The relationship between technological advance and MNE’s scale of internationalization is positive and nonlinear, with the slope greater at low levels of technological advance.

Hypothesis 2. The relationship between technological and MNE’s scope of internationalization is positive and nonlinear, with the slope greater at low levels of technological advance.

3.2 Industry dynamism

Dynamism is restricted to change that is hard to predict and that heightens uncertainty for key organizational members (Dess and Beard, 1984). More specifically defined by Melville et al. (2007) industry dynamism can be defined as environment of change that is difficult to predict, which creates uncertainty in managerial decision-making process. One of

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the central assumptions in the notion of international strategy is that different industries offer different potentials for the internationalization of firms (Elango, 2004). In addition, MNEs’ international orientation is also affected by external factors like industry-specific ones. The extent of globalization varies across industries (Cerrato, 2009). Some industries can be characterized by competition with global rivals while in the others companies compete on a more national or regional basis.

In dynamic environments managers must accelerate the speed of the strategic decision-making process, in that case they rely more on exploration and innovation as against structured decision-making (Melville et al., 2007). Furthermore, in rapidly changing industries higher investments in technological advance provides MNEs with ability to detect and seize market opportunities with speed and surprise, which is an advantage because according to Mudambi and Swift (2012) competitors are able to imitate leading companies’ competences, which makes earlier products and processes obsolete. Following that, higher technological advance intensity level can help outperform competitors and sustain competitive advantage, which encourages achieving greater scale and scope of internationalization of MNEs. Cerrato (2009) adds that in dynamic industries MNEs are always under pressure to develop new products, so in such cases R&D investments should be large in order to maintain their competitive position. MNEs concentrate on delivering superior technology and product rather than adapting to local customers needs (Cerrato, 2009) which gives more flexibility in operations and encourages expanding more globally rather than only regionally. Finally, in dynamic industries innovation can be leveraged better across more markets and thus industry dynamism positively moderates the underlying relationship between technological advance and scale and scope of internationalization of MNEs. These arguments suggest the following hypotheses:

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Hypothesis 3a. Ceteris paribus, industry dynamism positively moderates the relationship between technological and MNE’s scale of internationalization.

Hypothesis 3b. Ceteris paribus, industry dynamism positively moderates the relationship between technological and MNE’s scope of internationalization.

3.3 Economic policy integration

Another moderating factor of the relationship between technological advance and level of internationalization of MNEs taken into account in this study is economic policy integration, which can be defined as agreements in order to reduce the barriers to trade and investment, and to standardize the policies across countries (Cuervo-Cazurra and Un, 2007). The high economic policy integration is beneficial for firms since it results in improved access to foreign clients and suppliers, as well as makes easier to do business overall.

The empirical research of Cuervo-Cazurra and Un (2007) proved that R&D investment level increases after a country signs regional economic integration agreement. In addition to this contribution, later study of Banalieva et al. (2012) suggests that regional economic integration has a moderating effect on the relationship between home region focus and firms’ performance and internationalization level, because of the increase of firm’s efficiency due to reduction of trading costs. On the other hand, economic policy integration can increase competition for companies due to opening of national market. Increase in competition in this case can also result in higher investment to innovation level in order to sustain competitive advantage, which then leads to higher degree of internationalization of MNEs. The arguments mentioned in this section leads to the following hypotheses:

Hypothesis 4a. Ceteris paribus, the economic policy integration of MNE’s home region positively moderates the relationship between technological and MNE’s scale of internationalization.

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Hypothesis 4b. Ceteris paribus, the economic policy integration of MNE’s home region positively moderates the relationship between technological and MNE’s scope of internationalization.

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4 Research Methods

In this section we will discuss the methods used to test the hypotheses, starting with description of data and its collection process. The second part of the section will include the definitions of variables, which are needed in order to perform analysis. The third and last part includes the analysis and results.

4.1 Sample and Data Collection

The Fortune Global 500 list prepared by Fortune magazine, which annually ranks the largest 500 companies worldwide, was used as a primary sample for the analyses of the study. Corporations are ranked by total revenues for their respective fiscal years ended on or before March 31, 2013. The data for the study was therefore collected for fiscal year 2012. The Fortune Global 500 list was chosen for its wide spectrum, including companies based and active worldwide and operating in different industries, which is relevant in order to perform strong analyses and to answer our research question properly.

Only secondary data was used for the study and it was obtained from two different sources: Orbis database and annual reports of the companies. Orbis is a commercially available database provided by Bureau van Dijk, which contains information on both listed and unlisted 120 million public and private companies worldwide. Orbis database is widely used in international business research (e.g. Chakrabarti et al., 2007, in Banalieva et al., 2012; Banalieva and Dhanaraj, 2013). The advantage of Orbis database is its accuracy in reporting data as well as its extensive coverage of companies. As the second information source annual reports of the companies were chosen and collected from official websites indicated in The Fortune Global 500 list.

It is also important to notify that since the data for the final sample was collected from different sources, a crosscheck of information was performed. Firstly, information of

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company such as sales, number of employees and contact details were matched from The Global Fortune 500 list to Orbis database content, in the second stage of data collection information such as sales, assets, number of employees were compared between Orbis database and the annual reports. It was found that data reported across different sources of information were consistent with possible insignificant discrepancies due to reporting in different currencies in case of assets and sales. In order to have the final consistent dataset, the exchange rates provided in Orbis database were used for conversions to US dollars.

To investigate the hypotheses quantitative analyses are used as in the majority of related studies (Kotabe et al., 2002; Cerrato, 2009; Banalieva and Dhanaraj, 2013). The quantitative approach is also particularly pertinent given the availability from reliable databases of accurate and sufficient information in order to perform the analysis and to test hypotheses.

4.2 Variables

4.2.1 Dependent Variable

The dependent variable in this study is scale and scope of internationalization. The ratio of foreign sales to total sales (FSTS) is selected in my analysis in order to capture scale of internationalization of MNEs, which is consistent with majority of previous research – Kotabe et al., 2002; Rugman and Verbeke, 2004; Li, 2005; Cerrato, 2009; Filatotchev and Piesse, 2009; Oh, 2009. Gomes and Ramaswamy (1999) state that foreign sales to total sales ration can be viewed as a proxy for a firm’s dependence on its overseas markets for sales revenues. In line with that, Oh (2009) mentions that foreign sales to total sales represent the degree of internationalization due to downstream activities firm specific advantages. Another important argument justifying my choice while selecting FSTS as the variable for scale of internationalization is as acknowledged by Cerrato (2009) sales-based measures focus on a

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country rather than regional level of analyses, so it has higher explanatory power on domestic versus international companies’ orientation.

In order to capture regional versus global business orientation, it is vital to consider scope of internationalization of MNEs. In this case, the previous research uses either number of foreign countries in which firm operates (Gomes and Ramaswamy, 1999; Oh, 2009; Chao and Kumar, 2010) or the number of subsidiaries operating in foreign countries (Oh, 2009; Chao and Kumar, 2010). Contrary to the studies mentioned above, the ratio of global sales (excluding home-region sales) to total sales is selected as the measurement for scope of internationalization of MNEs, which is in line with the choice of Cerrato (2009). The study of Oh (2009), which aims to find out the appropriate measures for scale and scope of internationalization, tests both sales-based measurement as well as widely used count country and subsidiary measurement. After empirical analysis Oh (2009) proved that the scope metrics such as count of countries and subsidiaries do not grasp the scope of internationalization properly since they do not consider difficulties of geographic dispersion.

Lastly, it is important to mention that data collected according to the geographic segmentation of sales is divided into six areas – North America (including USA and Canada only), Central and South Americas, Europe, Asia, Oceania and Other (including the majority of African countries). Such geographical dispersion grants the advantage of a study compared to the majority of previous studies that usually limit their final sample to Triad region countries, which covers only the largest markets in the world - Europe, North America and Asia (Rugman and Verbeke, 2004; Banalieva and Dhanaraj, 2013).

4.2.2 Independent Variable

The interest of this study is to analyze the impact of technological advance on scale and scope of internationalization of multinational enterprises. R&D expenses are used for defining the exact dataset. Since it contributes directly to the research question and narrows

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the dataset from full list of Fortune Global 500 to the 237 companies, which report their R&D expenditure for the fiscal year 2012. R&D intensity level in the companies is selected to measure technological advance. Firms’ technological advance is captured with ratio of R&D expenditures to total sales, a widely used measure of firms’ innovation input (Li, 2005; Filatotchev and Piesse, 2009; Kirca et al., 2012; Banalieva and Dhanaraj, 2013). It is also used the square term of R&D expenditures to total sales used by Banalieva and Dhanaraj (2013), in order to test the nonlinearity hypothesized.

4.2.3 Moderators

As it is assumed in the theoretical framework additional factors, namely industry international dynamism and economic policy integration, have moderating effects on the relationship between internationalization of MNEs and technological advance level.

4.2.3.1 Industry dynamism

First of all, in order to create the variable for industry dynamism, companies are assigned to seven industries using SIC (Standard Industrial Classification) codes. First division is Mining with SIC codes from 1000 to 1499, from 1500 to 1799 is Construction division, from 2000 to 3999 is the division of Manufacturing, SIC codes from 4000 to 4999 refer to Transportation, Communications, Electric, Gas and Sanitary service. The fifth division is combined from original two divisions of 5000 to 5199 Wholesale Trade and 5200 to 5999 Retail Trade into one Wholesale and Retail Trade division due to small number of companies in this thesis dataset having SIC codes from 5000 to 5999. The sixth category is from 6000 to 6799 and it is the division of Finance, Insurance and Real Estate companies. Final division from 7000 to 8999 refers to the companies working in Service industry. It is important to mention that originally according SIC classification it exists two more divisions of Agriculture, Forestry and Fishing from 0100 to 0999 and Public Administration from 9100

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to 9729, but they are not included in this study since none of the companies in the scope of analysis operate in those industry divisions.

After assigning companies to different industry divisions the total sales are counted per industry for two periods, sales of fiscal year of 2012 and sales of five-year period average from 2008 to 2012. Then separate regressions for each industry were run in SPSS, where the dependent variable was average sales for period 2008-2012 and independent sales for fiscal year of 2012, in order to identify standard errors. Finally, industry dynamism variable is computed by dividing the standard error of the slope coefficient by mean of sales, as it is done in the study of Nielsen and Nielsen (2014). After calculation was performed industries appeared to be barely dynamic, so rankings for analysis were assigned from least dynamic (0) to most dynamic industry (6). The least dynamic industry is Mining, than Manufacturing, Transportation, Communications, Electric, Gas and Sanitary service, Wholesale and Retail Trade. The three industries with highest industry dynamism are Finance, Insurance, Real Estate, also Services and Construction. The assumption is that the higher industry dynamism the greater significance of technological advance on internationalization level of MNEs. It is also interesting to notice that usually companies operating in Finance, Insurance and Real Estate sector are being excluded from research analyzing R&D activities, because this sector do not report expenses on R&D. Nevertheless, six companies from the final sample, which reported their expenses on R&D, will be included in the analysis. Five out of seven of those companies operate in banking sector and one in non-life insurance.

4.2.3.2 Economic policy integration

The second moderator in this study is economic policy integration, which is a ranked measurement of three levels capturing the strength of economic policy integration. Similar measurement is used in Banalieva et al. (2012) paper where authors assign 0 for APEC, 1 for NAFTA and 2 for EU. Since in this thesis dataset companies are operating worldwide and the

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analysis is not limited to Triad region companies, the measurement has been expanded to group 0 for Partial scope agreement including not only APEC (Asia Pacific Economic Cooperation) but also three countries (Brazil, Venezuela, Chile) from LAIA (Latin American Integration Association) and one country (Turkey) from ECO (Economic Cooperation Organization). Group 1 includes Free trade agreements of NAFTA (North American Free Trade Agreement) and two countries (Saudi Arabia, The United Arab Emirates) from PAFTA (Pan-Arab Free Trade Agreement), and finally group 2 – Economic integration agreement includes countries in EU (European Union). Due to only few companies headquartered in the regions of LAIA, ECO and PAFTA, separate ranking were not assigned and only added to the classification used by Banalieva et al. (2012) within the groups with the same level of strength of economic policy integration within regions. The higher values of economic policy integration indicate higher levels of regional policy integration among the countries within that region (Banalieva et al., 2012). This country specific data was obtained from the World Trade Organization.

4.2.4 Control Variables

Finally, control variables are added to the analyses. Firm age calculated the number of years that has elapsed since the year of incorporation, which reflects a firm’s overall business experience to ta large extent (Li, 2008). Firm size defined by logarithm of number of employees working for the company, as larger companies are typically more capable of exploiting economies of scale (Jong and Houten, 2014), which also leads to higher possibility of international expansion. Orbis database used for this study also provides important financial indicators like ownership structure, net income, gearing, ROA, etc. that is useful in order to evaluate financial strength of companies additionally, since in the Fortune Global 500 list companies are ranked just according their revenues and assets. So additionally as

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control variables are selected ownership structure, if the company is state-owned or private-owned, also ROA.

The variables, which will be used for analysis in order to test theoretical hypotheses, are summarized in the first table below.

Table 1. Definitions of variables

4.3 Statistical Analysis

The final sample size is 237 companies instead the full Fortune Global 500 list, after excluding companies for which we were not able to compute all corresponding variables. Descriptive statistics of final sample shows the top five home countries were from the Triad region and accounted for total 64,2 percent of the whole population in the analysis. Another interesting fact to notice is that according the number of countries in which company operates, 45,3 percent of the companies had their operations distributed across all six regions – North America and Canada, Europe, Asia, South and Central Americas, Oceania, Other. On the other hand, 11,0 percent of companies limited their activities within home region or only domestic market.

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Furthermore, descriptive statistics of independent and control variables used in this research are presented in table 2. The average company age was 62,59 years and the average number of employees who work for the company worldwide is 114.872,70 (with the smallest company with 1.074 and the largest with 1.290.000 employees). 87,0 percent of the companies were private-owned, while 13,0 percent of companies were state-owned, which is important to know, since it has an effect on the strategy towards technical advance and global expansion in the company. Descriptive statistics shows that in terms of scale of internationalization 54,8 percent of total sales were achieved in foreign markets. In addition, the mean value of scope of internationalization of 0,452 indicates that 45,2 percent of total foreign subsidiaries were outside home region, which shows higher regional business orientation rather than global of the companies. The average amount of money spent for investments in technological advance was 3,6 percent of total sales and assets per company, which seems to be relatively small number, but will be analyzed further while testing the first and second hypotheses.

The variables were tested for multicollinearity by assessing correlations between all independent variables. Table 2 shows that all the values of the correlation coefficients are below 0,50, which is standard cut-off point value for multicollinearity (Nachum and Zaheer, 2005). Additionally collinearity diagnostics test was performed, which included the variance inflation factor (VIF) and tolerance level for each independent variable. A higher value of 10 for VIF value or the lower level of 0,1 are considered to be critical and causes multicollinearity problem. All VIF values of the examined variables in this study were around 1 and the tolerance levels most of the time obtained value around 0,9, which indicated that multicollinearity is not an issue in our analysis.

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In order to distinguish between technological advance effect on scale and technological advance effect on scope two models were tested. In the beginning two OLS (ordinary least square) regressions were performed, using scale and scope of internationalization as dependent variable. Afterwards, multiple curvilinear regression analysis was carried out in two models for scale of internationalization (Model 1) and scope of internationalization (Model 2) separately. The results of the analysis are presented in table 3. Model 1.1 and model 2.1 include the control variables effect on dependent variable. In the second sub-models – model 1.2 and 2.2 – the independent variable and its square term are added, since theoretical hypotheses state that relationship between technological advance with both scale and scope of internationalization of MNEs is non-linear. The third sub-models – model 1.3 and model 2.3 – additionally take into account industry dynamism itself and interaction of industry dynamism with technological advance as the moderator, thus testing hypothesis 3. For the calculation of interaction between industry dynamism and technological advance ratios were mean centered in order to avoid increased probability of multicollinearity after creating interaction variables. Lastly, in the fourth sub-models – model 1.4 and model 2.4 –economic policy integration was introduced as a moderator, thus testing for hypothesis 4.

The summary of analysis (table 3) includes Beta values and standard error values in the brackets next to Beta value of independent variables. Beta value is important measure in order to find out the direction of relationship with dependent variable and another vital factor is significance level, which shows whether variable is statistically significant and has impact on dependent variable. In order to compare sub-models between each other and to find out if additionally included variables add any value in explaining the dependent variable R square, R square change, F value, F change and p values were added in the end of the table. It is also important to mention that the change values (R square change, F change, Sig. F change) in

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third and fourth sub-models are indicated in comparison with the second sub-models since the study aims to analyze the impact of two selected moderators on independent and dependent variables separately.

4.4 Results

As it was mentioned, table 3 is the summary of performed hierarchical regression models in order to test theoretical hypotheses indicated in theoretical framework chapter.

The various fit parameters showed that our full models significantly fit data better. The R squared value improved after including additional factors, which had explanatory power on both scale and scope of internationalization. In the Model 1 where dependent variable was scale of internationalization all four sub-models were statistically significant with a p-value of at least lower than 0,10. On the other hand, in Model 2, the outcome happened to be different, because the sub-model 2.3, in which moderating effect of industry dynamism had been added, overall seemed to be statistically insignificant with a p-value higher than 0,10. The reasoning of specific results will be indicated while explaining each sub-model stepwise.

To begin with, all control variables had an explanatory power on scale of internationalization with significance level of at least 0,10, while in Model 2 only company size and ROA had statistically significant effect on the scope of internationalization of MNEs (p-value < 0,10). In addition, international expansion of MNE seemed to be driven by company age, company size and ROA, which had positive effect on dependent variable in Model 1. For example, during additional years in business MNEs gain more experience, which results in better management and overcoming the possible risks during the internationalization process. It is interesting to notice that ownership type negatively affected scale of internationalization (Beta = -0,221 with a p-value <0,01) meaning that stated-owned MNEs had a tendency to limit its operations in domestic market, while private-owned

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companies aimed to expand their business abroad. In the sub-model 2.1, only company size had positive explanatory power as larger companies are typically more capable of exploiting economies of scale (Hitt et al., 1997; Jong and Houten, 2014), which also leads to higher possibility of global expansion. The Beta value of -0,008 of ROA at significance level of 0,01 showed that MNEs with higher levels of return on assets were more likely to limit their operations within home region rather than expand globally.

Sub-models 1.2 and 2.2 tested the nonlinear relationship between technological advance and both scale and scope of internationalization (hypothesis 1 and hypothesis 2 respectively). Foremost, it is essential to mention that technological advance had greater explanatory power on explaining domestic versus international business orientation (R square = 0,198) rather than regional versus global orientation (R square = 0,132), which is in line with Cerrato (2009) findings. Moreover, both hypotheses 1 and 2 were confirmed as the relationship between technological advance and both scale and scope of internationalization is nonlinear (p-value = 0,069 and 0,003 accordingly) with the slope greater at low levels of technological advance (Beta = -9,658 and -10,432 accordingly).

Hypotheses 3a and 3b were tested with sub-models 1.3 and 2.3, saying that industry dynamism positively moderates the relationship between technological advance and scale and scope of internationalization. In this case analysis showed controversial results. In the model 1 industry dynamism had a direct negative (Beta = -0,024 with a p-value <0,10) effect on the scale of internationalization, but the interaction of industry dynamism with technological advance was statistically insignificant, thus no moderating effect was found as instead hypothesized in hypothesis 3a. Results obtained in Model 2.3 instead confirmed hypothesis 3b, the positive moderating effect of industry dynamism on the relationship between technological advance and scope of internationalization of MNEs does exist. The interaction between industry dynamism and technological advance was statistically significant (a p-value

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< 0,10) and showed that higher industry dynamism level strengthened the effect of technological advance while MNEs were expanding out of home-region to global markets (Beta = 0,457).

Finally, the positive moderating effect of economic policy integration on the relationship between technological advance and scale and scope of internationalization, as assumed in hypotheses 4a and 4b, was tested in the sub-model 1.4 and sub-model 2.4. Economic policy integration had positive explanatory power on scale of internationalization of MNEs (B=0,123 with a p-value <0,01), but the interaction between economic policy and technological advance did not have explanatory power on scale of internationalization (p-value > 0,10) so hypothesis 4a is rejected. Differently, in the second model the interaction between economic policy integration with technological advance had positive moderating effect on scope of internationalization (Beta = 1,029 with a p-value < 0,10), meaning economic policy integration does positively moderate the relationship between technological advance and scope of internationalization.

In sum, the first two hypotheses of our study were confirmed, meaning that the relationship between technological advance and both scale and scope of internationalization is nonlinear, with the greater slope at lower levels of technological advance. Hypothesis 3a was rejected while hypothesis 3b was confirmed, with industry dynamism positively moderating the relationship between technological advance and the scope of internationalization. Hypotheses 4a was rejected whereas 4b was confirmed; meaning economic policy integration positively moderates only the relationship between technological advance and scope of internationalization. Needless to mention, both moderators had power only to strengthen the relationship between technological advance and scope of internationalization, but not scale of internationalization of MNEs.

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5 Discussion

The findings of our research confirmed the ability of the technological advance to explain both scale and scope of internationalization of MNEs and gave more insight into factors moderating this relationship. More specifically, it was found that technological advance has greater impact on explaining global versus regional business orientation rather than domestic versus international. In addition to that, the relationship between technological advance and both scale and scope of internationalization is positive but nonlinear with a slope greater at lower level of technological advance. After the analysis, it was confirmed the positive moderating effects of both industry dynamism and economic policy integration on only scope of internationalization, but the research failed to prove the importance of the same moderating effects on scale of internationalization. Below, the academic relevance, the managerial implications, as well as, the limitations and suggestions for the future research will be discussed more detailed.

5.1 Academic Relevance

Firstly, as it was mentioned, the present research indicates the exact relationship between technological advance and both scale and scope of internationalization. In line with Cerrato (2009) study, it can be confirmed that greater investments in innovation leads to higher level of scale and scope of internationalization of MNEs. In addition, the identified academic literature gap was fulfilled by ascertaining that mentioned relationship is nonlinear with greater slope at lower levels of technological advance. Possible reasoning can be related to increasing costs of technological advance at higher levels of scale and scope of internationalization, which diminishes the positive effect. Furthermore, our research agreed with empirical findings that technological advance has a higher explanatory power on international expansion, but it has less power to explain global expansion (Cerrato, 2009).

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Second, our study sheds more light on the role of moderating factors of the relationship between technological advance and level of internationalization. Until now, current academic literature has confirmed that industry, in which a firm operates, and the level of economic policy integration of home-country with other countries play a role in the process of internationalization or has impact on the decisions about innovation investments (Elango, 1998; Cuervo-Cazurra and Un, 2007; Cerrato, 2009). Our research, on the other hand, found out that industry dynamism and economic policy integration also have power to explain the strength of the relationship between technological advance and scope of internationalization. Both higher industry dynamism and higher economic policy integration of home country with other countries lead to greater importance of technological advance when aiming for global business expansion rather than limiting operations within home country region. It is important to mention, that differently, industry dynamism and economic policy integration do not have statistically significant moderating effect on the relationship between technological advance and scale of internationalization.

5.2 Managerial relevance

Apart from the academic relevance the findings of our research also have managerial implications. First, this study proved once again than internationalization of company is a complex process and while planning international or global expansion strategies various combinations of different factors have to be taken into account rather than specific factor solely. Companies, which have plans expanding business abroad, should pay attention that technological advance is a significant factor in internationalization process and can make it more smooth and easier, which naturally helps to achieve greater economies of scale in a foreign market by being better prepared to withstand the pressure from competitors and to meet customers’ expectations.

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Secondly, in case of aim of global business expansion when investing in innovation also is important to consider the industry dynamism factor and the level of economic policy integration, since technological advance has greater effect on scope of internationalization in case of more dynamic industries and more closely economically integrated countries.

Having said this, it is clear that our recent study is not only valuable for academic research but also can be beneficial for the management of multinational enterprises when making strategic decisions on international or global expansion of their business.

5.3 Limitations and suggestions for future research

Despite of mentioned advantages of our research, its limitations have to be acknowledged as well. First of all, the dataset of all Fortune Global 500 list was reduced to less than a half of 237 multinational companies, which reported R&D expenses for the fiscal year of 2012. The outcome of the analysis might change if it would have been included smaller and younger multinational companies not included in the Fortune Global 500 yet.

Another factor, which can be indicated as limitation to this study is the calculation of variables for scale and scope of internationalization. In our research, it was used only sales-based measures, not taking into account assets effect on the scale and scope of internationalization, which possibly would specify the analyzed relationship between scale and scope of internationalization of MNEs, as well as, might change the importance of moderating effects analyzed in this master thesis.

Furthermore, only cross-sectional data was used for the analysis, in the future it can be advised to use longitudinal data, especially when calculating variables showing dynamics of certain factor. In this study case in order to capture industry dynamism only average of five years was taken into account instead yearly industry information, which might have resulted in not enough significance of the industry dynamism effect in case of relationship between technological advance and scale of internationalization.

The effect of technological advance on the scale and scope of MNE’s internationalization: the moderating role of industry dynamism and economic policy integration