The effect of the purchasing strategy on the scope and scale of a firm’s internationalisation: the moderating role of a firm’s focus on innovation

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The effect of the purchasing strategy on the scope and scale of a firm’s

internationalisation: the moderating role of a firm’s focus on innovation

MSc Business Administration - International Management Track University of Amsterdam

Student: Anna Bockstette Student ID: 1181755 Supervisor: Dr. Niccolò Pisani Second Reader: Dr. Mashiho Mihalache

Date of Submission: June 22nd, 2018 Master’s Thesis – Final Version

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1 Statement of Originality

This document is written by Student Anna Bockstette who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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2 Abstract

Nowadays, the purchasing function and purchasing strategies, especially global sourcing, are a topic of high relevance and its ability to contribute to a firm’s competitiveness has been widely accepted. Within the International Business literature, global sourcing has not been a topic of great interest. In light of this, the purpose of this study is to analyse the influence of having a global sourcing strategy on the scale and scope of a firm’s internationalisation. Moreover, this study investigates the moderating effect of a firm’s focus on innovation on the underlying relationship between global sourcing and internationalisation. Using the data of the Fortune Global 500 of the fiscal year 2016, the empirical results support a positive effect of global sourcing on the scale and scope of firms’ internationalisation. No evidence was found for the moderating effect of innovation expenses on the relationship between global sourcing and the scale and scope of internationalisation. Thus, this thesis contributes to the academic IB literature by giving insights on the relationship between global sourcing and internationalisation.

Keywords: Purchasing strategy; global sourcing; internationalisation; scale of internationalisation; scope of internationalisation; focus on innovation;

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List of Figures

Figure 1: Conceptual model ... 25

List of Tables

Table 1: Variables and their Operationalisation ... 29

Table 2: Mean, Standard Deviation and Correlation ... 30

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1. Introduction

‘The myth of a borderless world has come crashing down. Traditional pillars of open markets – the United States and the UK – are wobbling, and China is positioning itself as globalization’s staunchest defender’ (Ghemawat, 2017: 114).

In the last decade, opportunities to do business on a global scale have increased (Golini & Kalchschmidt, 2011) through the phenomenon of ‘globalisation’. Garrett (2000: 941) defined globalisation as the ‘… international integration of markets in goods, services and capital’. Globalisation has led to an easier internationalisation of companies; trade agreements make borders between countries less visible, and vast improvements in transportation and technology have resulted in cost-saving opportunities and simplified access to new customer markets (Schiele, Horn & Vos, 2011). Globalisation and the steady increase of flowing goods, capital, labour and information across borders have also led to a rise of ‘new sub-global “regional systems”’ (Schlie & Yip, 2000: 343). Many companies who claim to follow a global strategy are not global per se but are rather regionally based (Ghemawat, 2017; Rugman & Verbeke, 2004; Verbeke & Kano, 2016). Ghemawat and Pisani (2014) underlined this idea and found that the Fortune Global 5001 located nearly 50 per cent of their affiliates in their home region, in contrast however, companies headquartered in Europe located up to 70 per cent of affiliates outside of their home region. The economy is unevenly and imperfectly integrated across the world (Kim & Aguilera, 2015), leading to opportunities and constraints for the firms at the regional and global level. Internationalisation, on the one hand, can present a great opportunity for value creation; companies can benefit from economies of scale, spread research and development (R&D) costs and more effectively use resources and capabilities (Hitt, Hoskisson & Kim, 1997). However, on the other hand, it increases the level of uncertainty and risk (Hitt,

1_{Fortune Global 500 is a list of the worlds’ 500 largest companies ranged based on their revenue. In 2016, the} Global 500 generated $27.7 trillion in revenue and $1.5 trillion in profits, they employ 67 million people worldwide and are represented by 34 countries (Fortune, n.d)

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6 Tihanyi, Miller & Connelly, 2006; Lu & Beamish, 2001) through threats such as liability of foreignness (LOF) and liability of newness (LON). Throughout the years, several researchers have investigated the drivers for why firms expand internationally and follow an international strategy (e.g. Buckley & Cassson, 1976; Dunning, 1977; Hymer, 1976), such as economies of scale, experience, R&D, advertising or technology (Faeth, 2009). Porter (1986: 35) explained that ‘… international strategy has often been characterized as a choice between worldwide standardization and local tailoring, or as the tension between economic imperative (large-scale efficient facilities) and the political imperative (local content, local production)’, but neither of these characterisations accurately describe the depth of a firm’s international strategy choice.

Since the 1980s, the importance of the purchasing function within corporations has increased and gained more weight in the corporation’s strategy formulation. This is due to evolving trends associated with a firm’s supply chain, such as just-in-time production, international procurement, outsourcing, global sourcing or total quality (Tchokogué, Nollet & Robineau, 2017). Tchokogué et al. (2017: 109) stated that ‘until the early 2000s, purchasing’s dominant focus was on the “bottom line” impact through cost savings, quality improvement, and technology development’. The supply strategy contributes to the competitive advantage of the company (Carr & Schmeltzer, 1997; Lorentz, Töyli, Solakivi, & Ojala, 2016; Prajogo, Mena, & Nair, 2017; Tchokogué et al., 2017). However, to create value, management must align the supply strategy appropriately with the organisational objectives (Prajogo et al., 2017). In today’s business-to-business markets, companies are faced with a diminishing number of suppliers (Hüttinger, Schiele, & Schröder, 2014) or even ‘supplier scarcity’ (Vos, Schiele & Hüttinger, 2016: 4613). Such a supplier scarcity increases the company’s dependence on its suppliers (Mol, 2003; Nagati & Rebolledo, 2013; Vos et al., 2016), resulting in increased competition between the buying companies. For firms to effectively engage with the globalisation process and exploit the complexity that comes with it (Lorentz et al., 2016), they

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7 must internationalise their purchasing strategies (Loppacher, Luchi, Cagliano & Spina, 2006). Depending on the company’s internationalisation level, the purchasing strategy must be developed based on the integration and coordination of materials and processes, as well as the number of suppliers and operation locations. As companies move towards a global sourcing strategy, they go through different phases, from domestic sourcing to global sourcing, through international purchasing offices varying with degree of integration, risk, internationalisation, involvement and dependency (Loppacher et al., 2006). Global sourcing can best be described as actively coordinating and integrating activities, processes, methods and suppliers across international borders (Jia, Orzes, Sactor & Nassimbeni, 2017). Loppacher et al. (2006) proposed that the evolution of the purchasing strategy from domestic sourcing to global sourcing is coupled with the involvement in internationalisation; however, this has not been empirically tested. Therefore, the aim of my thesis is to empirically analyse whether a company following a global sourcing strategy affects the extent and process by which a company internationalises. Hence this thesis answers the following research question:

What is the relationship between the purchasing strategy and the extent and pattern of a firm’s internationalisation?

More specifically, this study explores the relationship between following a global sourcing strategy and the scale and scope of a firm’s internationalisation. This relationship is interesting to examine because several authors (e.g. Hallikas, Puumalainen, Vesterinen, & Virolainen, 2005; Horn, Schiele, & Werner, 2013; Hesping & Schiele, 2015; Hesping & Schiele, 2016; Schiele, 2007) proposed that a unified strategy is no longer applicable in an increasingly globalised world and that decisions need must be made for each supply commodity. Hence, with the partial integration across countries, the purchasing strategy might stimulate the international diversification of companies. As Lorentz et al. (2016) discussed, international distribution may occur as an unintended effect of expansion through mergers and

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8 acquisitions and the internationalisation of sales; certain purchasing strategies could increase the scale of a firm’s internationalisation and facilitate its expansion. Previous literature has failed to connect the purchasing strategy with the internationalisation process of a company; thus, I am adding to the academic literature by shedding light on this relationship. This study also examines the moderating effect of a firm’s focus on innovation. For the empirical analysis, I use secondary data provided by the ORBIS database and the annual reports in a hierarchical multiple regression analysis. The findings of this study support the hypothesised positive relationship between global sourcing and the scale and scope of a firm’s internationalisation. However, no evidence was found for the moderating effect of a firm’s focus on innovation on the relationship between global sourcing and both scale and scope of internationalisation. Based on the results, I highlight the academic relevance of this study and its contribution to the existing literature as well as practical implications and I propose directions for further research by drawing on the limitations of this study.

The rest of the thesis has the following structure. The next section reviews the relevant literature regarding internationalisation and purchasing strategies and presents the research gap. Afterwards, the section develops the hypotheses and offers the conceptual model. Section 4 describes the methodology and the results of the empirical analysis. Next, section 5 discusses the results, draws attention to the limitations of this study and provides implications and indications for further research. The paper ends by drawing a conclusion.

2. Literature Review

The subsequent section presents the main theories regarding the internationalisation of companies and reviews literature on the purchasing function and the different purchasing strategies. The section concludes with a paragraph about the research gap and a description of the research question.

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9 2.1 Internationalisation theory

In the field of international business, the internationalisation process of companies has been studied on a broad scale.

‘The world has been changing dramatically in the past 50 years. […] Fifty years ago, businesses were largely localised and served in more stable markets, while today advances in communication and transportation have not only facilitated the acceleration of MNE’s expansion but also spurred more intense competition and economic growth’ (Hitt, Li & Xu, 2016: 58).

Globalisation has had a significant impact on the development of companies and their internationalisation process (Hitt et al., 2016). The literature presents several terms, such as internationalisation, international diversification, level or extent of internationalisation, describing the same concept (Hitt et al., 2006; Johanson & Vahlne, 1997; Kim & Aguileira, 2015). To understand the extent to which a company is internationalised, meaning its involvement in international operations, one must consider the scale and the scope of a firm’s internationalisation (Hitt et al., 2006). The scale of internationalisation can be described as the firm’s dependency on foreign markets, and the scope of internationalisation refers to the geographical spread (George, Wiklund, & Zahra, 2005; Lu & Beamish, 2001). Rugman and Verbeke (2004) investigated, next to the scope of firm’s internationalisation, the global versus home region orientation of large multinational enterprises. Their findings indicated that the so-called ‘Triad-regions’, North America, the European Union and Asia, have a strong orientation on their home region by having nearly 80 per cent of their total sales in their home region. Whereby only a small number of companies can be perceived as having a truly global orientation, which is linked to having between 20 and 50 per cent of sales in each of the triad regions (Rugman & Verbeke, 2004). Ghemawat and Pisani (2014) underlined this idea and found that the Fortune Global 500 located nearly 50 per cent of their affiliates in their home

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10 region, whereby only companies headquartered in Europe, located up to 70 per cent of affiliates outside their home region. The regionalisation of companies is further strengthened by Mudambi and Puck (2016) who found evidence that majority of the Fortune Global 500 strategies are built around a regional focus, i.e. the largest proportion of sales, around 75 per cent, are generated within the home region.

In the last 50 years, the core unit of analysis in the international business literature has shifted (Rugman, Verbeke & Nguyen, 2011). Before 1960, the so-called ‘pre-Hymer’ area, researchers assessed national competitiveness through looking at the country level as a unit of analysis, using trade statistics and the level of foreign direct investment (FDI) as indicators. In the 1970s, the focus shifted to the multinational enterprise (MNE) and its foreign direct investments and the cross-border transfer of firm-specific advantages (FSAs) such as R&D knowledge or brand name. From the 1980s onwards, researchers focussed on the MNE as a network, with the subsidiaries being the core unit of analysis (Rugman et al., 2011). Hymer (1976) emphasised early on that monopolistic advantages were a reason for international expansion, and Vernon’s (1966) product life-cycle stressed that companies expand internationally to exploit country-specific advantages (CSAs). The argument is that by exploiting the CSAs, the transfer of know-how and knowledge between the parent and the subsidiary increases the company’s competitiveness (Rugman et al., 2011). Hymer (1960) recognised that when firms expand beyond the borders of their home country, they are faced with LOF, which refers to costs and disadvantages associated with doing business in the host country compared to the local competitors (Hymer, 1960; Zaheer, 1995). Hymer, the ‘intellectual father’, drew attention to the MNE and its FSAs as subject of analysis, leading to the fundamental change in international business (IB) studies. He found that the MNE’s possession of FSAs and the ability to leverage them is necessary to overcome LOF (Rugman et al., 2011). Other scholars who build on the concept of LOF are Johanson and Vahlne (1977),

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11 who proposed the Uppsala model of international expansion, stating that a company’s internationalisation process is a path-dependent process based on experimental learning. Companies were accordingly expected to begin their expansion in physically proximate markets with similar CSAs before they move into more distant markets (Kim & Aguilera, 2015). The third stage of literature in IB focusses on the subsidiary of the MNE as unit of analysis. One approach that dominates this stage is the concept of subsidiary initiatives by Birkinshaw (1996), who focussed on the ‘… innovative recombination of both home and host country CSAs, and the FSAs […] held by the MNE’s unit in these countries’ (Rugman et al. 2011: 757). Through such a subsidiary initiative, an MNE can generate and leverage new types of FSAs across the MNE’s network to solidify the overall competitiveness.

Another aspect in the IB literature that this thesis must examine is the internalisation theory (e.g. Buckley and Casson, 1976), which focusses on the firm as the unit of analysis, but compared to the internationalisation theory previously discussed, it reviews the MNE’s existence as caused by its efficiency properties. Internalisation means to include foreign business operations within the boundaries of the company (Hitt et al., 2997). Internalisation theory follows the major arguments of Coasian transaction costs economics (TCE) theory and brings them into context with the MNE. Following that line of thought, internalisation theorists Buckley and Casson (1976) emphasised the importance of imperfect markets and TCE, arguing that companies avoid external market imperfections by internalising intermediate markets and associated transaction with the intention to reduce costs of activities by considering their location choice. Rugman et al. (2011) stated that the internalisation of markets across national borders, thereby bringing independent activities under common ownership and control, is what causes MNEs to exist (Rugman et al., 2011). In contrast, Rugman (1981), who also based his theory on the imperfection of markets, argued that the development of MNEs occur by responding to the imperfection in goods and factor markets. The author elaborated that through

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12 the internalisation of transactions and markets, the company’s FSAs amplify the host country’s CSAs, positively affecting the competitive advantage (Rugman et al., 2011). However, Hennart (1982) described that for international expansion, the creation of a foreign unit must be more efficient compared to exporting the goods or services abroad. Having a foreign facility must be the more desirable outcome, which ’is the case if the MNE can organize inter-dependencies between economic actors located in different countries more effectively than markets’ (Rugman et al., 2011: 760).

Another theory describing the international expansion of firms is the eclectic paradigm or OLI paradigm (Dunning, 2000), which highlights motives for companies to make FDI. The OLI paradigm includes ownership advantages (O), location advantages (L) and internalisation advantages (I). Ownership advantages are the assets and resources the company owns, such as patented technology or brand name. Location advantages describe the advantages that occur from the specific location, such as natural resources, demand conditions or even political factors or the institutional environment, which make some countries more attractive than others. Internalisation advantages refer to benefits that a firm generates through the recombination, transforming, exploiting or leveraging of FSAs internally. Hence, a firm must decide whether to operate in a foreign country by considering the specific configuration of ownership and location advantages it is going to face. Next to the OLI paradigm, Dunning identified four major motives for firms to do FDI, namely natural resource seeking, market seeking, efficiency seeking and strategic asset seeking (Rugman et al., 2011).

Considering the recent discussion whether the world is globalised or rather regionalised (Ghemawat, 2003; Kim & Aguilera, 2015; Laryea, 2013; Rugman & Verbeke, 2004; Verbeke & Kano, 2016), Kim and Aguilera (2015) created a framework which focusses on the latest trends influencing the internationalisation strategy in a ‘semi-globalised world’. They described two paths of internationalisation: intraregional exploitation and multi-regionalisation.

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13 Companies ‘that successfully navigate the semi-globalized world can service an entire region by establishing operations in one or two countries and increase efficiency by organising their value chain activities on a regional basis’ (Kim & Aguilera, 2015: 115). In addition, the emergence of born-global firms or international new ventures challenges the traditional internationalisation theories. This new type of company leverages innovativeness, knowledge and capabilities to expand to foreign markets early on in firms’ development, despite having scarce financial, human and tangible assets (Knight & Cavusgil, 2004). One of the main features of these firms is that their nature is international, contrasting with the traditional firm that gradually evolved from operating solely in the domestic market for years to be fully engaged in international trade. According to Knight and Cavusgil (2004), born-global firms are often able to enter the first foreign market within three years after the domestic establishment. This early adoption of internationalisation is probably driven by two key trends, the globalisation of markets and the technological advances in information and communication technologies. Even though these trends are able to facilitate the early internationalisation, they are not sufficient to wholly explain the processes behind born-global firms.

2.2 Purchasing

In the literature, there are several terms used interchangeably to describe the same concept, namely, procurement, purchasing and sourcing. Even though these terms vary in scope and scale, no precise definition exists to make a distinction (Miemczyk, Johnsen & Macquet, 2012). According to Miemczyk et al. (2012), the usage of these terms is industry specific; for example, the public sector uses ‘procurement’ more often than ‘purchasing’. This paper does not focus on a single industry. Therefore, I use these terms interchangeably to cover all relevant literature. The literature makes a distinction between direct procurement, which is the purchase of material necessary for the company’s final product, such as raw materials or components, and indirect procurement, which is everything required to keep the business running on a day-to-day basis,

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14 such as cleaning services or office supplies (Vos et al., 2016). However, to serve the purpose of this study, I make no distinction and include both procurement categories when discussing purchasing strategies.

Prior to 1980, top management perceived purchasing as being a passive function within the business organisation. However, this changed when Michael Porter argued in his five forces the importance of the buyer regarding the competitive nature of the industry. Since then, there is a shift in attitude towards the role purchasing plays in corporate strategy, leaving behind the perception that purchasing is only a supportive role in ensuring that supplies meet certain standards for the production. During the 1990s, literature recognised a trend towards the integration of the purchasing function into the company’s strategic planning process (Carr & Smeltzer, 1997). Today, the purchasing function is recognised as being able to affect more than just the bottom line and contribute to the competitiveness of the company (Carr & Schmeltzer, 1997; Lorentz et al., 2016; Prajogo et al., 2017; Tchokogué et al., 2017).

2.2.1 Strategy development and global sourcing

Carr and Schmeltzer (1997: 200) described a purchasing strategy as the ‘… specific actions the purchasing function may take to achieve its objectives’. To go into more detail, such a purchasing strategy consists of three key decisions: a) criteria for establishing a supplier base, b) criteria for selecting suppliers, who will receive an order and c) the quantity to order from each supplier (Burke, Carrillo & Vakharia, 2007).

Hallikas, Puumalainen, Vesterinen and Virolainen (2005) implied that a suitable strategy formulation is necessary due to the ‘… rapid proliferation of outsourcing and the use of external resourcing’ (Hallikas et al., 2005: 73), meaning that a reactive and uniform strategy formulation is not appropriate anymore (Horn 2013, Hesping & Schiele, 2015; Hesping & Schiele, 2016; Schiele, 2007) and that firms must make a distinction between suppliers. The literature distinguishes between two broad categories of supplier classification models. One is

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15 the continuum approach, which is based on TCE, core competencies and governance structures, sorting the suppliers into either arm’s-length or market-based relations (Hallikas et al., 2005) or different partnerships such as joint-ventures or hierarchy-based relations (Cox, 1996). The other category is portfolio approaches which include ‘… an analysis of purchased items/services and relationship/management strategies for classified suppliers’ (Hallikas et al., 2005: 73). An example of such a portfolio approach is the Kraljic Portfolio Matrix, a segmentation based on the profit impact of the supplier’s commodity and supply risk (Kraljic, 1983). Including the power position of the supplier ‘by plotting the buying strength against the strengths of the supply market’ (Padhi, Wagner, & Aggarwal, 2012: 2), Kraljic formulated a strategy for each commodity, and suggested to ‘… form partnerships for strategic products; assure supply for bottleneck products; exploit power for leverage products and ensure efficient processing for non-critical products’ (M.C.J. Caniëls & Gelderman, 2005: 141).

After categorising the suppliers on their supply commodity, the firm must make a decision on the number of suppliers per commodity. The literature mainly distinguishes between single sourcing and multiple sourcing (Burke et al., 2007; Heese, 2015). Single sourcing implies relying on a single supplier to deliver the supplies needed, which involves high risk and increases the dependency on the supplier. By pursuing a multiple sourcing strategy, the required quantity is spread over several suppliers to ensure timely delivery, thus hedging the risk of creating a monopolistic supply base (Burke et al., 2007). Globalisation has been the ‘… most significant factor in the increase of supply chain risk’ (Lorentz et al., 2016: 872), influencing the decision on the number of suppliers as well as the supplier’s geographical location and whether to contract a supplier in close approximate or pursue supply on a global scale. To extend the supply base internationally might offer strategic benefits; it can help to obtain higher quality products and goods or ensure the availability of resources, access to new technologies, processes and even new markets (Lorentz et al., 2016). However, global-scale

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16 purchasing requires a ‘… more complex organisational structure to manage additional issues caused by cultural differences, long transportation distances and inadequate cost/benefit analysis’ (Jia et al., 2017: 83). A strategy is easily labelled as global sourcing, and even though global sourcing is a well-researched topic (Jia et al., 2017), no coherent definition exists. Some authors have described global sourcing as a way to source materials internationally or even just the simple description of purchasing only from a single supplier (Hesping & Schiele, 2015; Schiele et al., 2011). The terms ‘international purchasing’ and ‘global sourcing’ are often used interchangeably in literature, however, fundamental differences exist. International purchasing refers to a ‘commercial transaction between a buyer and a supplier located in different countries’ (Trent & Monczka, 2005: 24). A global sourcing strategy means more than just the sole acquiring of material on an international scale but also the coordination and adaptation of world-wide activities which is why I use the following conceptualisation by Jia et al. (2017) when discussing global sourcing. Jia et al. (2017: 83) defined global sourcing as ‘proactively integrating and coordinating common materials, designs, methods, processes, standards, specifications and suppliers across international borders’. Usually, companies move from domestic purchasing to international purchasing to global sourcing. By moving from domestic purchasing to international purchasing, companies need to deal with longer distances, currency fluctuations, different rules and regulations, customs, and language, cultural and time differences. Then if a company decides to pursue a global sourcing strategy they are additionally confronted by a higher level of cross-functional and cross-locational coordination and management (Trent & Monczka, 2005).

Loppacher et al. (2006: 35) mentioned the major driving forces of companies pursuing global sourcing strategies, which ‘… include domestic unavailability of some materials, poor-quality materials available in domestic markets, higher local prices, low domestic technological standards, compensation, and counter-trading’. It is worth mentioning that following a global

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17 sourcing strategy affects the organisational structures on a broader scale. As mentioned by Jia et al. (2017), pursing a global sourcing strategy requires a company to adjust and adapt its structure to manage the inherent complexity that comes with global sourcing. Returning to the definition used in this study for global sourcing by Jia et al. (2017), global sourcing implies more than just the sole purpose of obtaining material for production on an international scale; it is also the acquiring of services or business activities and offshoring of certain operation or support activities, such as human resource management or R&D. According to Lewin and Volberda (2011: 241-242), offshoring relates to ‘the activities which are subcontracted to parties operating outside the national borders of the offshoring party (cross-border), through either a captive centre […] or a third-party agreement’.

2.2.2 Purchasing strategy in international business literature

Authors in the international business literature have paid some attention to the purchasing function and purchasing strategies. Researchers have largely ignored focussing on global sourcing, and the study of this subject is ‘still in its infancy’ (Lewin & Volberda, 2011: 24). Before 2000, the importance of the purchasing strategy was hardly recognized and perceived as manly being a support function. Since then following a global sourcing strategy has been recognized as being a crucial factor in creating competitive advantage (Tchokogué et al., 2017). A great amount of research has focussed on gaining cost advantages through the purchasing function (e.g. Ferson & Locke, 1998; Guo, Lee & Swinney, 2016; Hu, Duenyas & Beil, 2013; Li & Kouvelis, 1999). Trautmann, Bals and Hartmann (2009) examined the organisational structures and governance at organisations that follow a global sourcing strategy and found that to maximise purchasing synergies, organisations should integrate across site but leave authority to each purchasing location. Furthermore, Lorentz, Kumar and Srai (2018) investigated the influence of the concept of distance in the context of the resource-based view on international purchasing and supply management, proposing several challenges for international purchasing,

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18 such as innovation, reputation and creating synergies between units and countries. When extending the boundaries of a global sourcing strategy beyond the sole purpose of supplying material internationally, and including offshoring of activities, Lewin and Volberda (2011) examined to what extent the offshoring of business services followed the traditional internationalisation theories and proposed an offshore decision model to illustrate the outcome of such offshoring regarding internationalisation. Overall, I have found that the majority of the empirical studies which include the purchasing function have investigated companies in North America or Asia, especially Japan (e.g. Ahmadijan & Lincoln, 2001; Hu et al., 2013; Karjalainen & Salmi, 2013; Roth, Money & Madden, 2004).

2.3. Research gap and research question

After summarising the main concepts, I can conclude that, so far, IB literature has paid little attention to the relationship between the purchasing strategy and the extent and pattern of the company’s internationalisation. Previously, studies have created a connection between the purchasing field to constructs that belong to a firm’s internationalisation process such as the concept of distance, motives to diversify such as efficiency seeking and governance structures. Researchers have broadly studied the fields of purchasing strategy, especially global sourcing (e.g. Jia et al., 2017) and the internationalisation process (e.g. Johanson & Vahlne, 1997, 2009; Kim & Aguilera, 2015). However, there have only been a limited number of empirical attempts in trying to quantify the impact of global sourcing and its antecedents and benefits (Steinle & Schiele, 2008). Loppacher et al. (2006) stated that the purchasing strategy depends on the involvement in internationalisation of the company. Therefore, it is interesting to test whether there is reciprocity between the purchasing strategy and internationalisation. Furthermore, Knight and Cavusgil (2004) investigated the drivers and antecedents of born-global firms and noted that one of the trends driving the early internationalisation of these firms is the emergence of globalised markets, which is accompanied by international sourcing.

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19 As already stated in the previous section, studies within the IB literature related to the purchasing function focussed mainly on companies in North America or Asia and Japan. By taking the Fortune Global 500 as a sample for this study, I can test hypotheses on a variety of industries using companies all over the world. This thesis aims at understanding to what extent the supply strategy influences the internationalisation of a company, which leads to the following global research question:

What is the relationship between the purchasing strategy and the extent and pattern of a

company’s internationalisation?

3. Theoretical Framework

After summarising and reviewing the relevant literature and stating the research question, the following section develops the hypotheses and conceptualises the theoretical model.

3.1 Purchasing strategy and scale and scope of internationalisation

As widely agreed upon in literature, a global sourcing strategy can be a key factor in gaining competitiveness advantage through exploiting the opportunity to supply from vendors throughout the whole world rather than just relying on domestic suppliers (Loppacher et al., 2006). Researchers perceive the decision to extend the supply base to new geographic locations especially outside the home as a way to improve the firm’s sourcing performance (Lorentz et al., 2007; Schiele, 2007; Schiele, Horn & Vos, 2011). Extending the supply base internationally may offer several benefits, such as availability of higher quality materials and resources or access to better technologies and new markets (Lorentz et al., 2016). As Loppacher et al. (2006) discussed, the development of the purchasing strategy is coupled with the level of international involvement and the advantages perceived and follows a gradual stepwise structure, with global sourcing being the last and most complex strategy. One can then argue that if a company pursues a global sourcing strategy, a high level of international experience can be expected. Experience

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20 is one of the factors facilitating international expansion. As Jia et al. (2017) and Quintens, Pauwels and Matthyssens (2006) stated, global sourcing requires a more complex organisational structure to cope with cultural differences, long transportation distances and an inadequate cost/benefit analysis. Furthermore, following a global sourcing strategy increases supply risks due to the long transportation distances, increased lead times or even due to the supplier’s location, e.g. being located in an area which is prone to have earthquakes, tsunami or hurricanes. Taking the great Tohoky earthquake and tsunami which destroyed most of the northeastern coast of Japan (Canis, 2011) as an example, it can be argued that due to following a global sourcing strategy and thus having suppliers abroad can increase the company’s dependency on foreign activities. Due to the natural disaster, several nuclear reactors in the region of Fukushima were affected which supply electricity for the companies in that region, next to the lack of electricity a large area had to be temporarily evacuated because of nuclear emission. Several manufacturing plants that assemble automotive and manufacture parts and components for vehicles had to be shut down, which affected the ability to produce the final vehicle of companies such as Toyota, Honda and Volkswagen (Canis, 2011; Fuchs, 2011).

Through purchasing activities, e.g. operating an international purchasing office (IPO), companies gain experience and knowledge about foreign regions, which then can help when entering these regions or countries to sell their service or product, increasing the foreign sales. Furthermore, such an IPO can mean that the company already has a relationship with the host country’s government and might be part of favourable trade agreements or is eligible for certain tax regulations, which might enhance the ability to sell in these countries. Therefore, I expect that following a global sourcing strategy increases the company’s dependency on foreign markets, leading to the following hypothesis:

Hypothesis 1: A global sourcing strategy is positively related to a firm’s scale of internationalisation.

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21 However, one could argue that a global sourcing strategy might also influence the scope of internationalisation. In other words, following a global sourcing strategy might increase a firm’s geographical reach and the sales generated outside of the home region. In the early stages of research on global sourcing, researchers used an internal development and procurement point of view; yet, more recently, the focus has shifted to offshoring activities and value chain contributions (Kotabe & Murray, 2004), following up on the assumption of Steinle and Schiele (2008) that purchasing activities in the target country may facilitate future sales activities increasing the geographical reach of the company. With firms already doing business with suppliers in foreign countries, the chances are high that the company has certain trade agreements with the target country. Being part of trade agreements and thus being familiar with the administrative process, rules and regulations, could influence the speed and ease by which the company can enter the target country. Due to having purchasing activities in a country, the company is accustomed to the culture and institutions, which means the company will not experience the LOF and LON as strongly. Being able to leverage the FSAs and CSAs is critical to overcome LOF and LON. Steinle and Schiele (2008) proposed that suppliers can contribute to or even be considered an FSA if they are sufficiently bound to a firm. If a company is already present in a certain region through an IPO or any other purchasing activity, this creates brand awareness, which facilitates the establishment of new entities in these countries (Kotha & Fortainer, 2001). Lorentz et al. (2017) supported this idea and found that the sourcing strategy and product can influence the reputation of a firm. In addition, Kotha and Fortainer (2001) emphasised that the reputation and the brand name can facilitate a firm’s entry into foreign market. A firm’s reputation can also decrease customers’ willingness to buy, as seen in the example of Nike Inc. and the sweatshop affair. Due to the sweatshop affair, Nike’s sales decreased by nearly eight per cent in 1999, and the stock price has fallen by approximately 15 per cent (The Guardian, 2001). Due to improving its environmental impact, providing

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22 transparency about its processes and ensuring and improving the working conditions in its supply chain, Nike was able to turn their reputation and to increase their sales (Mallenbaker, 2016; Nisen, 2013). Hence, as can be seen in the example of Nike, a reputation can heavily decrease the sales but also positively impact the foreign operations.

Furthermore, by having transparency of the supply chain such as the working conditions at manufacturing facilities or information about the environmental impact of the supply chain can facilitate the reputation of the company and create legitimacy. Combined with the fact that decision-making processes and autonomies have shifted from being very centralised at the headquarters to a more decentralised approach, giving the subsidiaries and IPOs more power and autonomy (Jia et al., 2014), the affiliates can more easily influence the legitimacy to positively influence the reputation and in turn, influence the foreign sales.

Recently, companies have focussed more on the founding of these IPOs in developing and emerging economies (Jia et al., 2014), together with the rapid growth of these emerging economies and many favourable changes in domestic policies (Kumar, Mudambi & Gray, 2013) global sourcing can positively affect the company’s geographical reach and facilitate the sales generation in these countries. Accordingly, I propose the following hypothesis:

Hypothesis 2: A global sourcing strategy is positively related to a firm’s scope of internationalisation.

3.2 Focus on innovation and the scale and scope of internationalisation

Innovation can be defined as the process of translating an idea or invention into a good or service (BusinessDictonary, n.d). Gunday, Ulusoy, Kilic and Alpka (2011) stated that innovation is a fundamental component of firm’s competitiveness, which is anchored in the organisational structures, processes and products. Being innovative is a crucial aspect in a firm’s growth strategy, in increasing the existing market share and to enter new markets

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23 (Gunday et al., 2011). As found by Knight and Cavusgil (2004) innovation activities can encourage the creation of new markets by reinventing the company’s products, processes and operations to serve those markets, leading me to expect that a firm’s focus on innovation has a positive moderating effect on the underlying relationship between global sourcing and internationalisation.

Existing literature on innovation has agreed upon the positive effect of innovativeness on a firm’s overall internationalisation (e.g. Filippetti, Frenz & Ietto-Gillies, 2001). This is in line with Cassiman and Golovko (2011), who indicated that advantages resulting from innovation activities, such as new product developments, product differentiation or higher productivity, can enable a firm’s international performance. Researchers perceive innovations as processes that can boost a firm’s competitiveness and might enable the creation of new technologies or increase the efficiency of production processes (Kafouros, Buckley, Sharp & Wang, 2008). On the one hand, to innovate, a firm must be able to apply internal knowledge. On the other hand, it needs to be able to internalise external knowledge from partners (Kyläheiko, Jantunen, Puumalainen, Saarenketo & Tuppura, 2011). In turn, if firms have the ability to leverage and combine the internal and external knowledge effectively, their international performance can be enhanced (Denicolai, Zucchella & Strange, 2014). Literature has unfortunately failed so far to generate coherent results or implications of the connection between global sourcing and innovation. Early studies (e.g. Kotabe and Murray, 1990) suggested that there is no direct connection between global sourcing and innovation (Lorentz et al., 2017). Later, literature implied that global sourcing constraints innovation potential, but the potential can be enhanced if there is a high degree of supplier integration throughout the value chain. However, when focussing more on what a global sourcing strategy implies and the consequences of engaging in innovation, I expect there to be an interaction between these two concepts regarding a firm’s internationalisation. Following a global sourcing strategy means

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24 that a firm should have tight coordination and communication among R&D functions, manufacturing and marketing activities across borders (Kotabe & Murray, 2004). Due to the fact that, today’s companies introduce new product innovations and process innovations at a faster pace and have a reduced innervational lead time, firms must follow a proactive management approach to stay competitive. Global sourcing increases the supply risk, and I, therefore, assume that global sourcing means that there is a high level of cooperation and communication between the suppliers, the company and its subsidiaries to increase the relationship and ensure timely delivery. Such a high level of cooperation and communication could mean that knowledge spill overs occur, making new knowledge and ideas accessible for the firm. Innovation technologies can help to support the communication between two units across large distances (Dankbaar, 2007). As global sourcing implies a high number of suppliers outside the home country, leakages of knowledge such as detailed information about customer demands in foreign countries by the suppliers can mean that if the company has a focus on innovation, it can more effectively and efficiently exploit the given knowledge to create new products that suits the foreign country’s demand, thus increasing foreign sales as well as the presence outside its home region.

Furthermore, I assume that with a focus on innovation combined with the experience acquired through global sourcing, the company is able to more easily leverage the FSAs and CSAs and thus overcome LOF and LON more quickly, leading to a faster internationalisation, especially regarding the scope. A firm’s profitability as well as growth dynamics result from constant R&D and innovation activities (Buckley & Casson, 2009). Drawing on the presented arguments, I expect that a firm’s focus on innovation will positively moderate the relationship between globalisation and the scale of internationalisation as well as on global sourcing and the scope of internationalisation. Accordingly, I propose the following two competing hypothesis:

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Hypothesis 3: A firm’s focus on innovation positively moderates the relationship hypothesised in H1.

Hypothesis 4: A firm’s focus on innovation positively moderates the relationship hypothesised in H2.

In conclusion, I have created the following conceptual model (Figure 1).

Figure 1: Conceptual model

4. Methodology

4.1 Sample and data collection

The sampling frame for this study is based on the world’s 500 largest companies, ranked according to their annual total revenue in US dollars for the fiscal year 2016 by the Fortune magazine. The Fortune Global 500 (FG500) is used as a sample as it provides a relatively large sample for which enough information is available. The FG500 have been used repeatedly to investigate the level of internationalisation of companies (e.g. Asmussen, 2009; Rugman & Verbeke, 2004; Rugman & Brain, 2003; Rugman & Li, 2007). Ghemawat and Pisani (2004)

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26 especially looked at the number of the subsidiary locations in the home region and abroad to study the level of globalisation of the FG500.

Secondary data for this study is retrieved from two different sources: ORBIS database and the annual reports of the companies. Secondary data analysis has the advantage of having less biased and highly objective data (Cantalone & Vickery, 2009). The final sample comprises 91 companies and was drawn on a convenience sample, i.e; only those companies were selected for which enough data was available.

4.2 Variables and Measure 4.2.1 Dependent Variables

The dependent variables used in this study are the scale and scope of firm’s internationalisation. Previously, internationalisation was often measured by using the foreign sales ratio as a proxy (e.g., Kyläheiko et al., 2011). However, internationalisation is more complex, which is why this study differentiates between the scale and scope of firms’ internationalisation (Hitt et al. 2006). The scale of internationalisation entails a firm’s dependency on its foreign activities (George et al., 2005) and is operationalized by the ratio of foreign sales to total sales. This measurement has been used before in literature (Cerrato, 2009; George et al., 2005; Rugman & Oh, 2013; Tallman & Li, 1996). The scope of internationalisation indicates a firm’s geographical reach (George et al., 2005) and is measured by the number of countries in which a firm operates a subsidiary (e.g. Tallman & Li, 1996). Alternatively, it can be looked at the ratio between global sales to total sales (Cerrato, 2009). Whereby global sales mean sales generated outside of the home region (Rugman & Verbeke, 2004) for example a firm based in Germany has the European Union as home region. For this analysis, I use the traditional sales-based approach to measure the scope of firm’s internationalisation.

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27 4.2.2 Independent Variable

The independent variable used in this study is the purchasing strategy the firm is following. To simplify the purchasing strategy, global sourcing is used as dummy variable whereby, a 1 is chosen if the company follows a global sourcing strategy and 0 = if it does not do global sourcing. Previously, the purchasing strategy has been operationalised by looking at the firm’s supply structure; different classes of materials are grouped putting the supplier into categories (Steinle & Schiele, 2008). However, due to a lack of available data on detailed supply categories or different supply strategies, the purchasing strategy is assessed as one single strategy. Information on the purchasing strategy are gathered by looking at the company’s annual report. If available, the number of suppliers outside the home region are taken into account. Next to that, a keyword search is done; a purchasing strategy is considered to be global if several of the following terms: international, all over the world, global sourcing, integrated processes, proactive, are used to describe the purchasing strategy or supply chain management.

4.2.3 Moderating Variable

In this study, a firm’s focus on innovation is used as moderator, which is measured by the R&D expenses as a percentage of total sales. This measurement has been previously used in literature to capture a firm’s innovation intensity (Fernandez & Nieto, 2006; Lu & Beamish, 2001). Even though, Kleinknecht, Montfort, and Brouwer (2002) concluded that this indicator has quite some weaknesses and one should rather use the total innovation expenditures, which cover an extensive variety of inputs into the innovation process opposed to only research and development expenses. However, this value is not available through ORBIS or the annual report which is why I am sticking to the ratio of R&D expenses to total sales to measure my moderating variable.

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28 4.2.4 Control Variables

In literature, a variety of firm and industry factors or variables can be found which could affect the degree and likelihood internationalisation. Therefore, I am including three prominent control variables and the first control variable I am including is the size of the firm (Firm size), because research has suggested that small to medium-sized companies tend to face higher liabilities compared to larger firms when internationalising (Eisenhardt & Schoonhoven, 1990; Lu & Beamish, 2001; Lu & Beamish, 2006). It was found that the firm size can affect the availability of resources and large firms are more likely to have the resources and capabilities needed to internationalise (George et al., 2005; Lu & Beamish, 2001). On the other hand, small companies are less opposed to change (Knight & Cavusgil, 1996) and often are quicker in responding and implementing new ideas (Crick, 2009; Knight & Cavusgil, 2004). Firm size is measured by looking at the number of employees.

In previous studies on internationalisation of companies (Fernandez & Nieto, 2006; Pisani, Caldart & Hopma, 2016), the age of the firm (Firm age) is included to control for the level of experience. Additionally, older firms can be expected to have the necessary infrastructure for internationalisation. The age of the firm is measured by looking at the year of inception until the year 2017.

Lastly, a dummy variable is added that shows whether a company is publicly listed or not (1=Yes; 0=No) to control for the type of firm (Kunapatarawong & Martinez- Ros, 2016). Table 1 shows the variables used in this study and their operationalisation.

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Table 1: Variables and their Operationalisation

4.3 Statistical Analysis and Results

Table 2 presents the descriptive statistics and the correlations, including the dependent variables as well as the control variables used in this study. After testing for normality and removing outliers, the final sample consists of 91 companies. In total, 38 companies follow a global sourcing strategy, and while the average scale of firm’s internationalisation accounts for 58 per cent, the average scope of firm’s internationalisation is 43 per cent. A One-way ANOVA shows that these 38 companies have on average a scale of internationalisation of 68 per cent, which is higher than the average scale of firm’s internationalisation and a scope of internationalisation of 53 per cent, which also exceeds the average. Furthermore, the descriptive statistics show that on average companies spend 4.3 per cent of their turnover on research and development. Looking at the age of the companies, the average age is 64 years, the average size of the firms in the sample amounts to 115645 employees, and 87 firms are publicly listed. This study uses hierarchical multiple regression analyses, meaning that all included variables are tested for potential problems caused by multicollinearity. Multicollinearity emerges when the correlation between predictor variables is too high which could lead to misinterpretation or overestimation of the empirical results (Hilmersson, 2014). However, a high correlation between the two

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30 dependent variables, scale and scope, is not problematic as both variables are used separately in different models. To further control for other aspects of multicollinearity, I investigate the variance inflation factors (VIFs) as well as the tolerance statistics (Hilmersson, 2014). The results of the collinearity statistics show that the VIFs are all around 1.1, which is an acceptable level as it is below 10 and the tolerance is around 0.9 which is also fine as it is above 0.2. Hence, multicollinearity is not an issue in this analysis.

Table 2:Mean, Standard Deviation and Correlation

In order to test the hypotheses proposed in this study, the Ordinary Least Square (OLS) method is used. The two dependent variables, scale and scope of internationalisation, are investigated separately. Table 3 present a summary of the results including 3 models for scale of internationalisation as the dependent variable as well as 3 models for the scope of internationalisation as the dependent variable. The table includes information about the standardised beta coefficients, the standard errors, the level of significance as well as general information regarding the model fit. A hierarchical multiple regression is used to investigate the effect of the independent variable, global sourcing, on the scale and scope of a firm’s internationalisation. Starting with the first step of the regression (Model 1), which shows the ability of all control variables to predict the scale of internationalisation. Model 1 illustrates that the control variables explain 11 per cent of the variance in scale as the dependent variable. Overall, this model is significant (F (3,87) = 3,584; p = .017) and when looking at the control variables the firm size has statistical significant positive impact on the scale of

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31 internationalisation (ß= .285; t=2,747; p=.007). Neither, the Firm Age nor being public is statistically significant.

In the second step of the hierarchical regression, the independent variable global sourcing is introduced into the model, which is illustrated in Model 2. Adding global sourcing to the model after controlling for control variables leads to a variance of 15,6 per cent that is explained by all predictor variables (R² change = 4,6; F (4,86) = 3.977; p= .005). Global sourcing has a significant impact on the DV (ß= .235; t = 2.167; p = .033) and by introduction global sourcing as IV to the model, the firm size loses its significance (ß=.2; t=1.838; p = .069) but being a public listed company becomes significant, it has a negative influence on the scale of internationalisation (ß = -.233; t = -2,308; p = .023). Therefore, the results do provide support for hypothesis 1, which is consequently accepted, meaning that global sourcing does have a positive effect on the scale of firm’s internationalisation.

Before testing the moderation effect of the firm’s focus on innovation on the relationship between global sourcing and respectively, scale and scope of internationalisation, a corresponding interaction term is computed. In order to reduce the threat of multicollinearity, the mean-centred values for both the independent and the moderating variable are considered and calculated to create the interaction term: Global sourcing x Focus on innovation. To test the moderation effect of a firm’s focus on innovation on the relationship theorised in hypothesis 1, both the interaction term and the moderating variable are added to the hierarchical multiple regression. The results are presented in Model 3 of Table 3. Adding these two variables increases R² to 20.3 percent, meaning that 20,3 percent of variance in scale of internationalisation can be explained by all predictor variables (R² change = 4.7; F (6,84) = 3,570; p = 0,003). In Model 3, the IV global sourcing (ß = .268; t= 2.483; p = .015) still has a positive effect and being a public firm (ß = -.247; t = -2.477; p = .015) is still negatively affecting the scale of internationalisation. In this model, firm size is statistically significant

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32 again (ß = .217; t = 2.019; p = .047). Furthermore, Model 3 indicates that having a focus on innovation is statistically significant and influences the scale of internationalisation negatively (ß = -.225; t = -2.215; p = .029). The interaction term is not significantly influencing the relationship (ß = -.072; t = -.715; p = .476). Consequently, hypothesis 3 is rejected, the findings suggest that a firm’s focus on innovation does not moderate the relationship between global sourcing and scale of internationalisation.

Similar methods are applied to test the effect of global sourcing on the scope of internationalisation. Model 4 displays the results when inserting only the control variables into the hierarchical multiple regression. 7.8 per cent of variance in the firm’s scope of internationalisation is explained by these control variables (F (3,87) = 2.469; p = .067). Similar to the results of Model 1, the predictor variables firm age and being public, do not have an influence on the scope of internationalisation but firm size is statistically significant (ß = .228; t = 2.162; p = .033) and affects the scope of internationalisation positively. Furthermore, Model 5 indicates that the relationship between global sourcing and the dependent variable scope of internationalisation is statistically significant (ß = .318; t = 2.943; p = .004). Through the introduction of global sourcing, being a public company becomes statistically significant and impacts the DV negatively (ß = -.232; t = -2,308; p = .023). Nevertheless, the results provide support for hypothesis 2 (F (4,86) = 4.180; p = .004), which is consequently accepted.

Lastly, the moderating effect of a firm’s focus on innovation on the relationship between global sourcing and the scope of firm’s internationalisation as theorised in hypothesis 4 is investigated by using multiple regression (Model 6). Model 6 includes all control variables, independent variable, the moderating variable as well as the interaction term and explains 16.5 per cent of the variance in the dependent variable (R² change = 0.2; F (6,67) = 2.489; p = .031). However, the results indicate that neither the moderating variable, firm’s focus on innovation (ß = -.04; t =-.380; p = .705) nor the interaction term (ß = .013; t = .128; p = .899) are

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33 significantly affecting the relationship between the independent variable and dependent variable. Hence, hypothesis 4 is not supported meaning a firm’s focus on innovation does not positively moderate the relationship between global sourcing and the scope of a firm’s internationalisation.

Table 3: Summarised Results of Regression Analysis

5. Discussion

The aim of this study was to fill a research gap in the IB literature by investigating to what extent following a global sourcing strategy influences the scale and scope of firm’s internationalisation. Additionally, an investigation of the moderation effect of a firm’s focus on innovation on the aforementioned relationship, is included. The statistical results provide evidence that following a global sourcing strategy significantly influences both the scale and scope of a firm’s internationalisation. Hence, a global sourcing strategy positively affects the

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34 scale and scope of firm’s internationalisation. However, regarding the moderation effect of a firm’s focus on innovation, no significant effect was found, neither on the scale nor on the scope of a firm’s internationalisation.

The subsequent section discusses the findings of this study by highlighting the academic and practical relevance and presents the limitations of this analysis as well as suggestions for further research.

5.1 Academic Relevance

Even though the attention on purchasing strategies and in turn, global sourcing has increased within the supply chain management and operation literature, it is not a well-researched topic within the IB literature. While purchasing has been investigated within the IB literature with regard to distance, risk management and cost structure, it has not been set into context with the internationalisation process of companies. Besides being the first study to examine whether a global sourcing strategy facilitates the extent and pattern of firm’s internationalisation, it introduces the moderating effect of innovation. By comparing the impact on both the scale and scope of internationalisation the thesis gives a deeper understanding of the underlying concepts. The results of the empirical analysis do validate a positive relationship between global sourcing and both scale and scope of firm’s internationalisation. In other words, following a global sourcing strategy increases the company’s dependence on foreign sales as well as positively affects the presence of the company outside their home region. Previous research on the FG 500 and their internationalisation found that these companies are rather regionally focused and not globally oriented. The results of this study show that companies following a global sourcing strategy are more oriented outside their home region than those companies who do not source globally. However, this might be related to the chosen sample as the study is based on the 500 largest companies in the world, who are ranked according to their revenue.

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35 While previous studies on the internationalisation of companies pointed out the challenges a company is faced with when expanding beyond their home region, this study suggests that global sourcing facilitates a firm’s global expansion. Operating across regions is associated with higher LOF compared to operating within the home region. Furthermore, the international expansion can be strained by cultural, administrative, geographic and economic differences (Ghemawat, 2001), hence, it can be said that companies who pursue a global sourcing strategy might be more successful at reducing and overcoming the liabilities and these distances when crossing regional borders.

However, contrary to what was expected regarding the proposed moderating effect of a firm’s focus on innovation on the aforementioned-relationship between global sourcing and both scale and scope of internationalisation no statistical significance was found. This implies that firms who engage in innovation activities are not able to further leverage the advantages of following a global sourcing strategy with respect to the scale and scope of internationalisation compared to companies who do not engage in innovation activities. In order to generate additional benefits that would affect the relationship between global sourcing and the scale and scope of internationalisation through having a focus on innovation, senior management should identify the firm’s innovation capacity, monitor how innovation is captured and where innovation expenses are allocated (Chung, Yum & Chan, 2004).

Even though evidence was provided for both hypotheses on scale and scope of internationalisation the results differ slightly. this study underlines the importance to adopt multiple perspectives when investigating issues related to internationalisation in IB research. 5.2 Practical Relevance

The empirical findings of this study also have practical relevance. First, the evidence provided by the statistical analysis that following a global sourcing strategy positively affects the scale and scope of firm’s internationalisation is interesting for companies who do not follow a global

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36 sourcing strategy. For instance, because global sourcing is characterised by being proactive in integrating and coordinating processes across international borders (Jia et a., 2017; Trent & Monczka, 2002). Even before following a global sourcing strategy, companies are engaged in activities across borders, e.g. international purchasing, and need to pay attention to the coordination of processes. Therefore, managers could try to be proactive when coordinating activities and ensuring that seamless communication is possible through high-end information technology. By investing into the coordination and communication between actors, the company might be able to leverage the advantages of sourcing globally to facilitate international diversification.

However, managers should be aware that the positive effect from global sourcing on the scale and scope of internationalisation might not be the result from only following a global sourcing strategy, but from engaging and proactively making the most out of the company’s assets and presented chances and possibilities that global sourcing offers.

Even though no statistical evidence was found for the moderating role of a firm’s focus on innovation, it still might be beneficial for managers to investigate where the R&D expenses are allocated to facilitate operations.

5.3 Limitations and Further Research

This study has limitations, which needs to be mentioned and addressed in future research on purchasing strategies in the context of firm’s internationalisation. To begin with, this study is based on the Fortune Global 500, and not all these companies have data available publicly. Companies are not required to disclose their R&D expenses in ORBIS and often did not disclosure them in the annual reports either, which reduced the sample size drastically. Secondly, the values for the global sourcing variable has been coded from the annual report, and the decision criteria has been chosen by the author beforehand. There was no generalizable strategy to follow, but a set of phrases were used to make a keyword search in the annual report

The effect of the purchasing strategy on the scope and scale of a firm’s internationalisation: the moderating role of a firm’s focus on innovation