Master Thesis The Moderating Effect of Firm Characteristics on the Internationalization-Performance Relationship: Evidence from High-tech Manufacturing Firms

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Master Thesis

The Moderating Effect of Firm Characteristics on the

Internationalization-Performance Relationship: Evidence

from High-tech Manufacturing Firms

By

Zhe Chen

S1736728

Supervisor: Dr B.Kibriscikli

Co-referent: Dr H.stek

Institution: University of Groningen

Department of Business and Economics

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Preface

Writing this paper was a huge challenge for me and there are so many people I owe thanks to. I owe huge gratitude to my family for their support and encouragement, without which this paper would definitely never have been finished. I am eternally grateful for my supervisor Dr B.Kibriscikli and co-referent Dr H.stek, for their critical and valuable comments and for their belief and support in my work. Thank you to all my friends, who go far beyond the call of duty to encourage, inspire and help me.

Signed, June 2008

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Summary

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Chapter 1: Introduction

1.1 Introduction

Internationalization is a phenomenon of geographical expansion of economic activities over a national country’s border (Ruzzier, Hisrich and Antonicic, 2006). With the rapid development of today’s economic and business world, internationalization plays a much important role than ever before and draws a lot of attentions from scholars in recent years. Much of the debate of policy makers, business academics and practitioners alike has centered on the nature and implications of the increasing importance of trans- and multinational, economic activity (Burgel, Fier, Licht and Murry, 2000). Naturally, one of the essential issues in the internationalization theories, the internationalization-performance relationship, has received extensive attentions in international business literatures. Just like one coin has two sides, internationalization does not have infinite benefits. It also can be subject to risks and failure (Ruigrok and Wagner, 2003). And from a learning perspective, the complexity of managing widespread business units increases with heterogeneity in markets (Bausch and Krist, 2007). On the other hand, according to Elango and Sethi (2007), while internationalization raises important issues of risk and uncertainty, cross-cultural aspects of employee conduct and consumer behavior, market structure and competition, and political and regulatory dimensions, it also provides new opportunities for growth, profitability and organizational learning. Internationalization gives MNCs the opportunities to gain a competitive advantage over less internationally active competitors (Bausch and Krist, 2007). From a resource-based view, global dispersion and exploitation of core competencies make it possible for the firm to generate economic rents as long as these resources retain their value (Aimit and Schoemaker, 1993). From the organization learning perspective, opportunities along the internationalization path provide the firm with cumulative knowledge, preparing it for further successful expansion (Ruigrok and Wagner, 2003).

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opportunities, huge risks and difficulties to multinational enterprises. So both sides’ effects need to be taken in consideration when we study it. In other words, we can employ the benefits and costs associated with firm internationalization process to measure the overall effect of internationalization on firm performance. And for the focus of this study, firms in high-tech manufacturing industry, internationalization is necessary for the firms to be successful (Elango and Sethi, 2007). So a study in this field could be very meaningful. I hope this paper could bring valuable insights into the existing internationalization literature.

1.2 Problem Indication

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internationalization-performance relationship, they attempt to figure out a best way to describe and explain this relationship. Unfortunately, little consensus were reached here. Their results vary from U-shaped (Capar and Kotabe 2003; ) to inverted U-shaped (Davidson, 1980; Sundaram and Black, 1992; Tallman and Li, 1996) and cubic curves (Contractor, Kundu and Hsu, 2003; Lu and Beamish 2004; Yu, 2004, Ruigrok and Wagner, 2007). So given the variety of results, we can see that it is really meaningful to inspect the internationalization-performance relationship again from a brand new perspective by using the latest data sample. Standing on the top, by combining practical situation and the useful findings from previous studies and by adding some new insights into this field, this paper could provide a much more comprehensive understanding on the internationalization theory.

On the other hand, according to the research by Kochhar and Hitt (1995), performance outcomes of a firm’s international strategy are influenced by three sets of factors, i.e., firm, industry, and home/host country. From the firm level, many studies incorporate firm-level characteristics only as control variables in the inspection of the relationship. Therefore, I think that greater insights could be offered into this area if we give these firm specific characteristics separate treatment. It is possible that the internationalization-performance relationship is context-dependent and that an effect therefore exists only under certain conditions (Bausch and Krist, 2007). Different firm-level characteristics may produce different internationalization-performance effects. Given the circumstance, certain firm factors could be able to create certain competitive advantages. These firm specific resources could be necessary to maximize the comparative advantages associated with internationalization. Hence, we should not overlook the potential effects of firm characteristics on the relationship. So the key question here is whether some firms can outperform their competitors through the internationalization process. A close check on each firm characteristic makes it possible to have a thorough and detailed understanding on how the internationalization-performance relationship actually works. Besides, it could give managers meaningful implications when making strategic decisions.

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On one hand, although there are a large number of studies on the internationalization-performance relationship, the high-tech manufacturing industry has not been given extensive attention while this industry provides a good sample to study the internationalization-performance relationship. Internationalization is believed to be particularly important to high-technology industries (Elango and Sethi, 2007). These sectors are commonly characterized by high costs for research and development, decreasing product and technology life cycles and strong competition from foreign firms (Burgel, Fier, Licht and Murry, 2000). It could be really meaningful to conduct a comprehensive study on this industry about the internationalization-performance relationship. On the other hand, focusing on one single industry could also control for industry effects since industry may also have significant influences on the relationship. This study also controlled for country effects. In this way, we can have a close inspection on the firm-level differences in internationalization-performance relationship. Furthermore, comprehensive studies in the cubic (S-shaped and inverted S-shaped) form of internationalization-performance are still far from enough. By conducting a research in the above unique context, this study will be able to offer a unique insight into the internationalization-performance relationship and broaden our knowledge in this field.

1.3 Research Objectives and Questions

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inspect the internationalization-performance relationship, and provide a more comprehensive understanding on the relationship. This is the main purpose of this paper. This paper aspires to present some useful suggestions for not only scholars in this field but also for company mangers in their international expansion strategy. On the basis of the above research background and problem indication, I come up with the following main research question:

What is the relationship between degree of internationalization and firm performance?

In order to make the main research question more specific and make it easier to be carried into practical test, from two different facets, one general and one specific, I introduced two sub-questions to elaborate the main research question.

What is the relationship between internationalization and firm performance in high-tech manufacturing industry context?

How is the relationship between internationalization and firm performance moderated by firm-level variables?

1.4 Thesis Structure

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Chapter 2: Theoretical Framework and Hypotheses

This chapter will provide the theoretical framework of this thesis. In the following section, I will introduce some literatures concerning the theoretical and empirical results of the internationalization-performance relationship studies. Literatures which support the notion of inclusion of firm-level variables in the internationalization-performance relationship will also be presented. On the basis of the theoretical framework presented, the hypotheses of this study will be introduced in this chapter.

2.2 Previous studies on internationalization-performance relationship

A large number of empirical studies have been conducted to investigate the relationship between the degree of internationalization and firm performance. This section will review the results of previous studies. Three kinds of internationalization-performance can be drawn from previous findings. They are linear (positive and negative), curvilinear (U-shaped and inverted U-shaped) and cubic (S-shaped and inverted S-shaped) relationships.

2.2.1 Linear relationship

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concerning the linear relationship were contradictory. The findings of some researches supported the view that the costs of international expansion outweigh the associated benefits. According to Denis et al (2002), the increases in global diversification reduce excess value, while reductions in global diversification increase excess value. And the linear relationship does not apply to all situations. Some studies argued that the linear positive relationship can only be applied to small economies. (Elango and Sethi, 2007).

2.2.2 Curvilinear relationship

Some scholars found the relationship between internationalization and firm performance is non-linear (Davidson, 1980; Kogut, 1985; Capar and Kotabe 2003; Porter, 1985; Sundaram and Black, 1992; Tallman and Li, 1996). But still, limited consensus was found here. Some studies showed the relation is U-shaped, while other found the relation is inverted U-shaped. Scholars proposed that MNCs encounter both the benefits and costs of internationalization (Ruigrok and Wagner, 2003), and both sides of effects should be taken into account.

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headquarters operations and large research and development outlays can be increasingly spread over (Kogut, 1985; Porter, 1985). Therefore, degree of internationalization is only positively linked to firm performance after certain stage in the international expansion process.

The inverted U-shaped relationship means that firms would experience increasing performance at the initial stage of internationalization, but the benefits are not infinite. After a threshold, firm performance will begin to decline. According to the learning theory of the Uppsala Model (Johanson and Wiedersheim-Paul, 1975), firms would choose to conduct international expansion in the countries that have smaller psychic distance first. They would be able to leverage their home country competencies in these locations easily (Davidson, 1980). But along with further internationalization, logistics, trade barriers, cultural diversity and environmental factors might increase the cost of operations (Sundaram and Black, 1992). As a result, the increasing costs associated with international expansion will gradually outweigh the associated benefits. According to Tallman and Li (1996), the reason firm performance will increase is because strategic resources are given a greater scope. While performance will decrease is because the product scope exceeds the range of these resources and governance scope. Hence, firm performance will suffer beyond a certain threshold, which shows an inverted U-shaped relationship.

DOI DOI

Performance Performance

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2.2.3 Cubic relationship

Based on prior literature on the internationalization-performance relationship, Contractor et al (2003) came up with a three-stage theory (the S-shaped relationship). Later, some scholars provided empirical evidences which support the S-shaped relationship (Lu and Beamish, 2004;Ruigrok, Amann and Wagner, 2007; Yu, 2004). According to Contractor et al (2003), the reason why there are so many contradictory findings concerning the internationalization-performance relationship is that in some studies it may simply be that a quadratic term was not introduced into the equation, and that a linear fit was statistically significant. In other cases the data may be capturing only part of an overall sigmoid (S-shaped) function. All prior major findings of the internationalization-performance can be found within the S-shaped curve, depending on which part of the S-shape. We can see that from the figure below. Below I will discuss the trade-offs associated with the S-shaped curve of the internationalization-performance relationship.

In the first stage of internationalization, according to the S-shaped relationship, there is a negative slope for the performance. Firms have to face a large amount of entrance costs that initially outweigh the incremental benefits of internationalization

Stage 1 Negative slope Performance DOI Stage 2 Positive slope Stage 3 Negative slope

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(Gomes and Ramaswamy, 1999). But the costs and barriers of early internationalization are not assumed to be onerous-otherwise few firms would venture abroad (Contractor et al, 2003).

In the second stage of internationalization, further geographical scale makes possible efficiencies that improve performance (Contractor et al, 2003). After firms have overcome the initial difficulties and costs associated with stage 1, with higher efficiencies, their benefits begin to outweigh all the costs. So in the second stage of internationalization, the relationship between internationalization and performance is positive.

In stage 3 of internationalization, the benefits of further international expansion are not infinite, and many firms have to handle the outcomes of “over-internationalized” (Contractor et al, 2003). Since then, there are increased costs that begin to outweigh the benefits associated, which in turn lead to a decline in performance. Besides “over-internationalized”, due to further international expansion, other associated costs keep increasing (Sundaram and Black, 1992), which might gradually outweigh the benefits. Therefore, once again, there is a negative relationship between degree of internationalization and firm performance.

High-tech manufacturing firms in Western Europe: A test of the four-stage relationship

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Europe. Here are my reasons.

Unlike firms from developing markets, most of the firms from advanced nations like Western Europe tend to be much larger relatively. And compare to firms from developing countries, firms from developed countries are characterized by a high stability rate and greater managerial satisfaction (Beamish, 1985). Besides that, western countries firms have a long tradition of operating internationally. Firms in these countries are much more internationalized than firms in developing countries. It means western country firms might have more experiences and longer history in the international markets. According to Contractor et al (2003), a few firms overextend themselves into the sub-optimal stage 3. There are 2 reasons. It is difficult for a firm to assess when it is over-internationalized and some firms may deliberately over-internationalize, for long-term strategy reasons such as market share. So unlike the emerging market firms, firms from Western Europe have more chances to “over-internationalize” and to cover all the three stages proposed by Contractor et al (2003), because of their relatively larger size and because of their long history and abundant experiences in the international markets.

And for firms in high-tech industry, internationalization can be very important. The international operations are necessary for the firm to be successful (Elango and Sethi, 2007). According to Burgel, Fier, Licht and Murray’s research (2000), for firms acting in technological niches the expansion into foreign markets can be a way to increase sales and to thus to recover initial sunk costs over a shorter time frame. Their results show that firms with international sales have higher sales growth than firms that sell only domestically. From this point we can also see that firms in high-tech industry have more chances to reach the stage of over-internationalized.

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other hand, these “liability of foreignness and newness, initial entrance costs” do not necessarily constitute key internationalization hurdles at low DOIs (Ruigrok and Wagner, 2003). I believe Western Europe high-tech firms are able to handle all these initial difficulties well. So in the early stage of internationalization, costs associated with internationalization do not outweigh the benefits.

When these high-tech manufacturing Western Europe firms further expanding into countries they are less familiar with, they have to handle the increased costs associated with logistics, trade barriers, cultural diversity and environmental factors (Sundaram and Black, 1992). So I expect to see a decline in performance in the second stage.

After that, I believe these firms have the ability to overcome the increased costs associated with stage 2 and will be able to experience increasing performance again after they have learned how to successfully handle the difficulties. But the benefits will not be infinite. Due to these firms have relatively larger size, the importance of internationalization in the high-tech industry and their long history and abundant experiences in the international markets, they may easily go over-internationalized. So in the fourth stage of internationalization, further international expansion means the associated costs begin outweighing the benefits and firms have to suffer from performance decline. The relationship is shown in Figure 4.

Thus, on the basis of the above arguments, I come up with the first hypothesis

Hypothesis 1: The internationalization-performance relationship for high-tech manufacturing firms will have four stages; i.e. the performance development increases, then declines, then increases, and finally decreases as the degree of internationalization increases.

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2.3 Previous studies on the moderating effects of firm-level characteristics

Firm characteristics could also moderate the relationship between internationalization and firm performance. This section will review prior literatures on the moderating effects of firm characteristics on the internationalization-performance relationship. The firm characteristics I take into account here are research and development intensity, firm age, financial leverage and firm size.

2.3.1 Research and development intensity

How the research and development influence internationalization is a question that remained unclear. But most of the studies in this field hold the view that R&D could positively influence the international expansion. According to the research by Ravenscraft and Scherer (1982), a firm’s R&D spending, which is a major predictor of innovativeness, is positively associated with company profitability. Hitt, Hoskisson and Kim (1997) argued that international diversification provides firms with incentives to invest in innovation and provides them with greater returns from innovation. Hence, this interplay between internationalization and firm R&D intensity

Stage 4 Over-internationalized Stage 2 Negative slope Stage 1 Positive slope Performance Stage 3 Positive slope DOI

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could bring a win-win situation to a firm’s economic return and its international growth. Firms with high R&D intensity and a concentration of the market for high-technology products have more chances to be able to accelerate the pace of internationalization expansion (Young. 1987), which on the other hand, will bring more opportunities along. And from the long-term perspective, a firm’s expenditure on R&D might not lead to instant benefits, but has a long-term effect on firm development, which in turn, might bring constant profitability in the future. Hence, based on the above arguments, we can see that R&D could positively influence the internationalization-performance relationship. So in this paper, I use R&D intensity as a moderator. Therefore, I hypothesize that internationalization has a greater potential to influence firm performance for firms with higher R&D intensity. So here come the following hypotheses:

Hypothesis 2a: Research and development moderate the relationship between internationalization and firm performance.

Hypothesis 2b: Firms with higher R&D intensity level could achieve better performance through internationalization.

2.3.2 Firm Age

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young firms’ advantage of fast learning might also lead to a better international development, which in turn, could positively influence the financial performance. On the other hand, compared to old firms, young firms tend to have less bureaucratism and less complex management structures, which might help young firms to make quick responses to changes. Younger firms might be at a flexibility advantage when it comes to the adaptation needs of internationalization (Bausch and Krist, 2007). Therefore, based on prior literature, I come up with the following hypotheses:

Hypothesis 3a: Firm age moderates the relationship between

internationalization and firm performance.

Hypothesis 3b: Younger firms could achieve better performance through internationalization.

2.3.3 Firm size

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co-specialized assets in order to appropriate the benefits of their innovations. For a firm during its international expansion process, these factors could help to maximize the benefits from internationalization. From the perspective of upper echelon, since managers from small firms may be short of international experience, small firms’ absorptive capacity of management at early stages of international expansion might be limited (Bausch and Krist, 2007). Thus, the hypotheses based on the above arguments are:

Hypothesis 4a: Firm size moderates the relationship between

internationalization and firm performance.

Hypothesis 4b: Larger firms could achieve better performance through internationalization.

2.3.4 Financial leverage

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very important role in a firm’s process in internationalization. Thus it will lead to a better financial performance. In consequence, the following hypotheses are developed:

Hypothesis 5a: Firm’s financial leverage level moderates the relationship between internationalization and firm performance.

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Chapter 3: Research Methodology

This chapter will describe the methods and data used throughout this study. Section 3.2 will describe the sample selection procedure. The following section, 3.3, will present the operationalization and way of measurement of each variable. Section 3.4 will describe the research methodology used in this study.

3.2 Sample Selection and Analysis

The data used in this study covers 74 listed western country firms over a five-year period, from 2002 till 2006. I dropped the firms with missing data so in the final sample all firms for which complete data were available. I collected data on financial performance, foreign sales, total sales, total assets, r&d expenses, total debt and year of establishment. The sample was selected from Amadeus Database. Data on financial performance, total sales, total assets, total debt and year of establishment were collected from this database. Information on foreign sales and research and development expenses were collected from financial annual reports firms published on their official websites. The reason I chose the time period from 2002 to 2006 is mainly because 2002 was the earliest year for which most firm-level financial data was available from firms’ annual report. Due to data availability and my interests in capturing firm level differences, such as research and development intensity, the research targets of this study are highly developed economies, the Western Europe countries. Such countries provide relatively complete data and hold a large number of high-technology firms. There are 11 countries covered in this study (Germany, United Kingdom, Finland, Sweden, Norway, Denmark, France, Netherlands, Belgium, Austria and Italy).

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international operations are necessary for the firms to be successful (Elango and Sethi, 2007). I identified high-technology industries by the 3-digit US-SIC codes based on a list of industries developed by AeA (American Electronic Association). I excluded services firms in the list since there are significant differences between manufacturing firms and services firms (Contractor et al, 2003). The firms covered in this study come from high-tech manufacturing industries. They include computer and office equipment, consumer electronics, communication equipment, electronic components and accessories, semiconductors, industrial electronics, photonics, defense electronics and electro medical equipment. All firms within these industries from Amadeus were included and the initial sample consisted of 202 firms in Western Europe. Firms with missing data were dropped, so the final sample consisted of 74 firms over the 5-year period. Altogether there are N=74*5=370 observations in the final sample.

3.3 Variables

3.3.1 Dependent Variable

Based on a review of past studies, the financial performance measure in this study is ROA (Return on assets), which has been widely used by previous studies on the relationship between degree of internationalization and firm performance (Contractor, Kumar and Kundu, 2007; Daniels and Bracker, 1989; Gomes and Ramaswamy, 1999;Yu, 2004).

3.3.2 Independent Variable

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internationalization-performance relationship studies (Contractor, Kumar and Kundu, 2007; Buhner, 1987; Elango and Sethi, 2007). Second, some studies found that the foreign sales ratio correlates highly with other operationalization alternatives (Gomes and Ramaswamy, 1999; Tallman and Li, 1996). So FSTS could be representative. Third, according to the study by Thomas and Eden (2004), the foreign sales ratio captures the extent of importance of international operations relative to total operations and thus the degree of dependence of the firm on foreign markets. Therefore, I think FSTS measure of the degree of internationalization (DOI) is appropriate.

3.3.3 Control Variables

In line with previous studies on the relationship between firm internationalization and performance, a few control variables have been introduced to the models.

Firm size was measured by the natural logarithm of total assets for all models. All foreign currencies have been converted to euro according to the exchange rates on May, 4, 2008. Age of the firm was measured by the company’s number of years of operation since incorporation. Research and development intensity was measured by the portion of R&D expenses to total sales. Leverage was measured by the company’s debt ratio which is the ratio of total debts to total assets.

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3.4 Methodology

3.4.1 Statistic methods

Since the time period in this study is from 2002 to 2006, the research involves both cross-section and time-series data. So I used the panel regression analysis. In order to minimize cross-section heteroskedasticity and time-series autocorrelation problems which are often encountered when dealing with time-series analysis, this study employed generalized least squares (GLS) method in line with previous studies (Contractor, Kundu and Hsu, 2003; Lu and Beamish, 2004; Shen, 2006). The assumptions of a generalized linear regression model in a two-stage generalized least squares (GLS) regression allows for non-constant variance and corrects for autocorrelation (Contractor, Kumar and Kundu, 2007). The models were estimated with Eviews 5.0.

When we apply the GLS in regression, we have two kinds of models. The fixed effects model and the random effects model (Greene, 2000). If we pooled the observations and used GLS, we would have biased estimates. But if we fit fixed-effect or random-effect models which take account of the repetition we can control for fixed or random individual differences1.

The fixed effects model is as follows:

Yit=β1t +βkXkit + ξit

Where Yit is the dependent variable;

Xkit is the independent variable;

β1t is the individual effect;

t is the observation time period. ξit is the error term

The model is appropriate where we consider each individual to have a fixed effect shifting the Yit up or down.

The random effects model is as follows:

1

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Yit= βkXkit +Ui + ξit

Where Yit is the dependent variable;

Xkit is the independent variable;

t is the observation time period. Ui is the error term of the i

ξit is the error term

It has the advantage of using fewer degrees of freedom, and that individual differences are considered random rather than fixed and estimable. But it has the disadvantage of requiring no correlation between the regressors and the Ui.2 According to Yi (2002), the fixed effects model is appropriate when the focus of the study is only on some individuals in the sample. The random effects model is appropriate when the focus of the study is on the total sample rather than some individuals. This study cares about the total situation so here I conduct my research on the basis of the random effects model.

3.4.2 Regression Models

As for the first sub-question, this paper will use Contractor et al’s (2007) model to test what kind of relationship is applicable. Four different models will be tested: one with just the linear term, second with the squared term, third with the third order term, fourth with the fourth order term added.

Linear Model: Perf = β0 +β1 Size +β2 Age +β3 RD +β4 Debt + β5 DOI +ε (1) Squared Model: Perf = β0 +β1 Size +β2 Age +β3 RD +β4 Debt + β5 DOI +β6 (DOI)2 +ε (2)

Cubic Model: Perf = β0 +β1 Size +β2 Age +β3 RD +β4 Debt + β5 DOI +β6 (DOI)2+β7(DOI)3 + ε (3)

Perf = β0 +β1 Size +β2 Age +β3 RD +β4 Debt + β5 DOI +β6 (DOI)2+β7(DOI)3

2

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+β8(DOI)4 + ε (4)

Where Perf is a financial performance variable (ROA), which is the dependent variable here. DOI is the degree of internationalization, which is the ratio of Foreign Sales/Total Sales (FSTS). DOI is the independent variable in this paper. (DOI)2 is a second-order item = (FSTS)2 . (DOI)3 is a third-order term. (DOI)4 is a fourth-order term. Size is a proxy for company size (natural log of total sales), Age is a proxy for the number of years the company has been established. RD is a proxy for R&D intensity which is measured by the portion of R&D expenses to total sales. Debt is a proxy for leverage which is measured by the ratio of total debts to total assets. Size, Age, Debt and RD served as control variables in these models. ε is the error term.

If the sign of the coefficient of DOI (β5) is significant in model 1, the linear relationship would be supported.

The U-shaped relationship would be supported if the following conditions were met: (1) the sign of the coefficient of DOI (β5) is negative and the sign of the coefficient of (DOI)2 (β6) is positive. (2) The coefficient values of DOI and (DOI)2 are significant. (3) The Adjusted R2 for U-shaped Model is higher than that in the linear model.

The inverted U-shaped curve would be supported if the following conditions were met: (1) the sign of the coefficient of DOI (β5) is positive and the sign of the coefficient of (DOI)2 (β6) is negative. (2) The coefficient values of DOI and (DOI)2 are significant. (3) The Adjusted R2 for Curvilinear Model is higher than that in the linear model.

Similarly, the inverted S-shaped curve would be supported if the following conditions were met in the cubic model: (1) the sign of the coefficient of DOI (β5) and (DOI)3 (β7)are positive and the sign of the coefficient of (DOI)2 (β6) is negative. (2) The coefficient values of DOI, (DOI)2 and (DOI)3are significant. (3) The Adjusted R2 for the cubic Model is higher than that in the linear and squared model.

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term of DOI will be added to the model. In order to control for country effects, I incorporated some country dummy variables into the equations above. I only listed the equation with the fourth-order term below.

Perf = β0 +β1Size + β2Age + β3 RD + β4Debt + β5 DOI +β6 (DOI)2 +β7 (DOI)3 +β8 (DOI)4 +β9UK +β10Scandinavia + β11Other + ε (5)

Where UK, Scandinavia, Other are country dummies with UK=1 when the firm comes from UK, Scandinavia=1 when the firm comes from Scandinavia, and Other=1 when the firm comes from Austria, The Netherland, Belgium, France or Italy. Germany serves as the base dummy variable here.

In this way, the first sub-question will be fully answered. We can have a clear understanding on the general relationship between internationalization and performance.

3.4.3 Methods to test for firm characteristics moderating effects

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Chapter 4: Data Analysis and Results

This chapter will provide the empirical analysis. Section 4.2 will present the descriptive statistics for the overall sample. Section 4.3 will present the correlation analysis and 4.4 will provide the results of normal distribution test. In the next sections, the main body of the data analysis part will be presented, which is the internationalization-performance relationship analysis and the analysis of moderating effects of firm characteristics.

4.2 Descriptive Statistics

Table 1 summarizes the descriptive statistics for the overall sample. From table 1, we can see that the average value of ROA is -2.62, and the standard deviation is 21.14. It means that over the investigated period, there are huge differences in financial performance among high-tech manufacturing companies. As for DOI, the average value is 66%. It shows that most firms are in the high degree of internationalization. The average value of debt ratio is 44% (maximum value is 298% and minimum value is 2%), it shows that there are also huge differences among firms in capital structure. As for R&D intensity, the mean value is 16%. Since this paper focus on high-tech manufacturing firms, the R&D intensity is much higher than that in other studies (1.4% in Lu and Beamish’ research, 2004; 1.9% in Shen’s research, 2006).

--- Insert Table 1 about here ---

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France, the Netherlands, Austria, Belgium and Italy (30). --- Insert Table 2 about here ---

Table 3 summaries the descriptive statistics for observations from Germany, UK and Scandinavia, which accounts for 92% of the total number. The average ROA value of Germany (1.42) and Scandinavia (-0.67) is higher than the average value of the total sample (-2.62), while the average value of UK is much lower than that (-8.35). As for degree of internationalization, firms from Scandinavia have higher average DOI value (73%) than the average value of the total (66%), the average values of DOI of Germany and UK firms are 62% and 63%. Germany firms (35) have longer history than that of UK (31) and Scandinavia firms (28). Respectively, the average values of debt ratio of Germany, UK and Scandinavia firms are 47%, 35%, and 50%. And compared to the average value of R&D intensity of overall samples (16%), UK firms spent the most money in R&D (25%), while the average value of Germany and Scandinavia firms is 8% and 9%.

4.3 Correlation Analysis

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4.4 Normal distribution test

In order to avoid errors in the data, I checked the normal distribution of the data. Table 5 present the relevant information. Usually, we can use the outcomes on skewness and kurtosis to check data normality. If skewness and kurtosis are ranging between -1 and +1 the data can be described as normal distributed. From table 5 below, we can see that data on all the variables are not in this range. It means that I need to give the data transformation to improve the normality.

A significant violation of the assumption of normality can seriously increase the chances of committing either a Type I or II error (Osborne, 2001). Type I error is a probability that I will reject H0 while it is true, while a type II error is a pribability that I accept H0 while it is wrong (Keller and Warrack, 2003). In order to improve the normality of variables, I transform the data on age and research & development intensity into natural log variables (the variable “size” has already been transformed into natural log in the first place). Since transformation into natural log is not the best way for all the data, I transformed data on ROA, DOI and debt ratio by using the NORMDIST function in excel. This function returns datum as a normalized value from a distribution characterized by the specified mean and standard deviation value. This function has a very wide range of applications in statistics.3 The transformed descriptive statistics for total firms are presented in table 6 below. We can see from the tables below, data transformation significantly improve the normality of initial

3

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data. But due to data transformation, I lost some valuable data. The number of final observations becomes 359 instead of 370.

4.5 Internationalization-performance relationship analysis

4.5.1 Five-year data

This study used the generalized least square (GLS) regression to test the relationship between degree of internationalization and firm performance. I estimate linear, square and cubic regression models to test which model is the most suitable model to show the internationalization-performance relationship. Table 7 below shows the empirical results of the five-year panel data for the full sample.

The F-values for all models are significant and adjusted R2 range from 0.19 to 0.20. Internationalization can explain only a part of the financial performance of multinational firms (Contractor et al, 2003), so we can understand that the adjusted R2s were quite low. The results also show that large and old firms have better financial performance than small and young firms. The relationship between performance and research and development intensity is surprisingly negative.

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DOI2 is positive. This shows that firm financial performance first declines and later increases with higher degree of international expansion, which is the U-shaped relationship. In the square model, the threshold lies in the level of 20.41% of internationalization.4 The internationalization-performance relationship is negative when internationalization levels are lower than 20.41% and positive at levels higher than 20.41%. This confirms that the U-shaped phase does exist in the internationalization-performance relationship.

From model 3 (the cubic model), we can see that after the third order term DOI3 is introduced, it shows an inverted S-shaped relationship between performance and internationalization. It shows that there are at least three stages exist in the internationalization-performance relationship for high-tech manufacturing firms from Western Europe. Two thresholds lie in the levels of 30.37% and 60.84% of DOI.5 The relationship between internationalization degree and firm performance is positive when internationalization levels are lower than 30.74%, negative at a moderate range (30.74%-60.84%), and positive again at levels higher than 60.84%.

From model 4 (fourth-order term added), we can see that the coefficients of DOIs are not significant. According to the results up to now, the relationship between internationalization and performance is inverted S-shaped. If the true relationship between degree of internationalization and firm performance is inverted S-shaped, a lot of firms still have the potentials to keep expanding so that they might gain better

4

ROA = 0.0389*AGE - 0.1361*DOI + 0.3334*DOI2 + 0.0216*DEBT - 0.0913*RD + 0.0185*SIZE + 0.0399, and let age=ln (average age) =3.1863, debt=normdist (average debt) =0.4834, rd=ln (average rd) =-2.5027, size=ln (average assets) =5.2715. Then ROA= 0.5003 - 0.1361*DOI + 0.3334*DOI2.

∂(ROA)/ ∂(DOI)=-0.1361 + 0.6668*DOI=0, thus DOI=0.2041=20.41%

5

ROA = 0.0465*AGE + 1.4181*DOI - 3.500*DOI2 + 2.5580*DOI3 - 0.1390*DEBT - 0.1213*RD + 0.0165*SIZE - 0.0940, and let age=ln (average age) =3.1863, debt=normdist (average debt) =0.4834, rd=ln (average rd) =-2.5027, size=ln (average assets) =5.2715. Then ROA= 0.3775 + 1.4181*DOI - 3.500*DOI2 + 2.5580*DOI3.

∂(ROA)/ ∂(DOI)=1.4181 - 7*DOI + 7.674*DOI2

=0, thus DOI=0.6084 (60.84%) or 0.3037 (30.37%)

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performance.

4.5.2 Geographic region effects

I then divide the sample into three groups according to the country where the firm comes from (UK, Germany, and Scandinavia). Table 8 shows the results of the firms from UK. From all the four models we can see that there is no significant relationship between degree of internationalization and firm performance. There is also no significant relationship between age, debt ratio and performance either. The same as the total sample, large firms in UK have better performance. And research and development intensity is negatively associated with performance.

As for firms from Germany (Table 9), there is a positive linear relationship between DOI and firm performance. And firm size is only significant in the linear model. The larger the firm size, the better the performance. There is a negative relationship between r&d intensity, debt ratio and performance.

Table 10 presents an inverted U-shaped relationship for firms from Scandinavia. The threshold lies in level of 39.47% of DOI. The relationship between internationalization and R&D intensity is also negative.

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4.5.3 Five-year data with geographic region effects

From the above analysis, we can see that the results from different regions are different and the relationship between internationalization and performance is inverted S-shaped, so I test the following equation with country dummy variables added.

Perf = β0 +β1Size + β2Age + β3 RD + β4Debt + β5 DOI +β6 (DOI)2 +β7 (DOI)3 +β8 UK + β9 Scandinavia + β10 Other + ε (6)

Where UK, Scandinavia, Other are country dummy variables with UK=1 when the firm comes from UK, Scandinavia=1 when the firm comes from Scandinavia, and Other=1 when the firm comes from Austria, The Netherland, Belgium, France or Italy. Germany is the base dummy here.

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--- Insert Table 11 about here

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---4.6 Analysis of the moderating effects of firm characteristics

Although from the regression results, we could also know whether firm-level variables have significant influences on firm performance, how they moderate the internationalization-performance relationship is an issue that remains unclear. So I not only incorporated them as control variables in the regression model, I also gave each firm characteristic separate treatment to have a more specific understanding. I used the one-way ANOVA to test the moderating effects of firm characteristics. I divided the sample firms into two subgroups, based on whether they were above, or below, the 5-year mean value of one of the firm characteristics as the cut-off mark. Then I conducted one-way ANOVA test to compare the two groups in terms of DOI and performance over the 5-year period.

According to the regression results above, we know that the relationship between internationalization and performance is inverted S-shaped, and two threshold points lie in the levels of 30.16% and 61.48% of DOI, which means there are three stages. In order to be more specific, on the basis of the above result, I divided the sample into three subgroups, based on whether they were above, within, or below, the range of the two thresholds points (subgroup 1: firms with DOI<30.16% (stage 1); subgroup 2: firms with DOI>30.16% and DOI<61.48% (stage 2); subgroup 3: firms with DOI>61.48% (stage 3)). Then within each subgroup, I conducted ANOVA tests for each firm-level characteristic.

4.6.1 The moderating effect of research and development intensity

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of the total firms have higher research and development intensity level than the mean value. Consistent with results from the panel regression analysis, firms with high R&D intensity level achieve worse financial performance. But these firms with high R&D intensity level have higher level of internationalization when compared to firms with low R&D intensity. So Hypothesis 2b was not supported.

---

Then I divided the total sample into three subgroups, based on which stage they belong to. From table 12a, 12b and 12c we can see that for firms in stage 1 (DOI<30.16%) and stage 2 (30.16 %< DOI< 61.48%), different levels of R&D intensity could result in significant differences in ROA. Firms with high R&D intensity level achieve worse performance. But for firms in stage 3 (DOI>61.48%), the difference in ROA for firms with different R&D intensity levels is not significant. As for DOI, the differences for firms in stage 1 and 3 are significant. We can also see that firms in stage 2 with low R&D intensity level achieve the highest performance level among all (ROA=0.6323).

--- Insert Table 12a about here

--- --- Insert Table 12b about here

--- --- Insert Table 12c about here

---

4.6.2 The moderating effect of firm age

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firms while the difference in degree of internationalization between these two subgroups is not significant. Since the fact that there is a relationship between internationalization and performance and there is a significant difference in performance between the two subgroups, we can see firm age could moderate the internationalization-performance relationship. Hypothesis 3a was supported. From the table below, we can see that old firms have better performance than young firms which is the same as the regression result, which is the opposite of Hypothesis 4b. So hypothesis 4b was not supported. On the other hand, the mean value of old firms’ internationalization degree is lower than that of the young firms.

Then I divided the sample into three subgroups according to the stages. From table 13a, 13b and 13c we can see that for firms in all three stages, there are significant differences in firm financial performance between old firms and young firms. Old firms outperform young firms. For firms in stage 1 and 3, there are significant differences in DOI between old firms and young firms. Older firms in stage 3 achieve the highest performance level (ROA=0.6879).

---

4.6.3 The moderating effect of firm size

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between large firms and small firms. So Hypothesis 4a was supported. Firm size could moderate the internationalization-performance relationship. It is consistent with the results from the regression analysis above. There is a positive relationship between firm size and firm performance. Compared to the performance of small firms, large firms have better performance and higher degree of internationalization as well. So we can tell that firms could achieve better financial performance through internationalization by increasing their firm size. Hence, Hypothesis 4b was supported.

---

Then I divided the sample into three subgroups according to the stages. From table 14a, 14b and 14c we can see that for firms in stage 2 and 3, there are significant differences in firm financial performance between large firms and small firms. In these stages, large firms outperform small firms. The differences in DOI for all three stages are significant. It means that throughout the international expansion process, firm size could significantly influence the degree of internationalization. Larger firms in stage 3 achieve highest performance level (ROA=0.6878)

---

4.6.4 The moderating effect of firm leverage

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firms with high leverage level and firms with low leverage level are not significant. From this result, we can not tell whether firm leverage could moderate the internationalization-performance relationship. So Hypothesis 5a was not supported. Firms with high leverage level have better performance than that of firms with low leverage level, which is contradictory with the results from the regression analysis. Hypothesis 5b was not supported. The mean values of internationalization degree of the two subgroups are almost the same.

---

Then I divided the sample into three subgroups according to the 3 stages. From table 15a, 15b and 15c we can see that only for firms in stage 2, the difference in performance between firms with high level of leverage and firms with low level of leverage is significant. But contradictory to my hypothesis, firms with high leverage perform better in this stage. The difference in DOI is only significant in stage 3. Firms with higher level of leverage in stage 3 achieve the highest level of financial performance (ROA=6032).

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Chapter 5: The moderating effect of firm characteristics on the

internationalization-performance relationship

After the data analysis, I will talk about the conclusions. Let’s have a look at the main research question again:

What is the relationship between degree of internationalization and firm performance?

In the following sections, I will provide discussion and findings on the analysis related to this main research question. Section 5.2 will present the discussion concerning the relationship between internationalization and firm performance. Section 5.3 will discuss the moderating effects of firm characteristics. Section 5.4 will present an overall conclusion.

5.2 The internationalization-performance relationship

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internationalization. Then in the third stage, these firms could overcome the difficulties associated with stage 2 and would be able to experience increasing performance again (DOI>61.48%). From this result, we can see that few firms have reached the stage of “over-internationalized”, so most firms still have the potential to gain more benefits through internationalization.

From this study, we can see that compared to stage 1 and stage 3, the moderate level of international expansion of high-tech manufacturing firms in Western Europe is not the prime period. Firms have to suffer from constant decline in financial performance. Although lower levels of internationalization can bring firms increasing benefits, the true advantage of operational flexibility still comes from higher levels of internationalization (Yu, 2004). Therefore, for those high-tech manufacturing Western Europe firms, the best strategic decision is that they should not limit their potentials and capabilities within the first stage of internationalization. Instead, these firms should keep expanding internationally and try to overcome the difficulties and costs associated with internationalization. Finally, once these firms overcome all the difficulties, they will be able to taste success again. Meanwhile, through the process of internationalization, these firms might not only gain economics benefits, but also gain precious experience, global reputation and many other valuable intangible assets.

5.3 The moderating effects of firm characteristics on the

internationalization-performance relationship

As I have discussed the relationship between internationalization degree and firm financial performance, now I will move on to the discussion of moderating effect of firm characteristics on the relationship. The analysis result show that R&D intensity, firm age and firm size have moderating effects on the internationalization-performance relationship. Firm financial leverage’s moderating effect is not significant. Although firm financial leverage’s moderating effect is not significant in the overall relationship, for firms in their moderate levels of internationalization, the difference in performance is significant. Firms with high leverage level perform better.

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low R&D intensity in their moderate level of internationalization seem to have the best financial performance. The implication here is that for firms in stage 1 and 2, moderate reduction in R&D expenditure might be beneficial. For high-tech manufacturing firms, the expenditure on research and development is not only necessary but also critical to the development of the firm. One of the explanations of the result is that some firms spend too much money on R&D, and not all the money has been fully used. Firms with lower R&D intensity may have a better capital structure which could help the firms to yield more financial benefits through internationalization than firms with higher R&D intensity. The managerial implication is that high-tech manufacturing firms still should pay high attention to research and development, but meanwhile they should also work on a better R&D budget which is most suitable for the company’s development.

According to the results, old firms have better performance than that of young firms, which is opposite to my hypothesis. And older firms in stage 3 achieve the best performance when compared to the first two stages. This means through years of development, old firms could gain more useful experiences in the process of internationalization and therefore they are able to achieve better financial performance.

As for firm size, compared to the performance of small firms, large firms have better performance and higher degree of internationalization as well, especially for firms in stage 2 and stage 3. Large firms in stage 3 achieve the best performance when compared to other stages. Firms with larger size have more chances to achieve scale economic effects, to handle emergency more efficiently, and to survive in the market. Hence, increased size associated with firm development could help the firm to gain not only financial benefits through the process of international expansion.

5.4 Conclusion

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internationalization process since R&D intensity also has moderating effect on the relationship. For firms in their initial and moderate level of internationalization, moderate reduction in R&D expenditure might be beneficial. Once the firms overcome the “declining stage” in the internationalization process, they could yield benefits again and become truly competitive MNCs. Figure 5 below shows the overall internationalization-performance relationship, and how firm characteristics moderate it.

This paper also has some contributions. It contributes to the existing body of knowledge in several ways. First, it attempts to further check the applicability of the three-stage theory of internationalization proposed by Contractor et al (2003) and attempts to adapt the theory to practical situation. Second, this paper gives firm characteristics separate treatment so that we can have a better understanding on their effects and have a more thorough understanding on the overall internationalization-performance relationship. Third, it focuses on high-tech manufacturing firms, for whom internationalization are pretty important. This provides us a special perspective to study the internationalization-performance relationship.

Notes: n means negative influence; p means positive influence

Age p p n p p p n p Age Leverage Stage 1 Positive slope Performance DOI Stage 2 Negative slope Stage 3 Positive slope

Figure 5 An inverted S-shaped relationship

R&D

Age

R&D

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Chapter 6: Future Research and Limitations

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