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Master’s Thesis MSc IB&M
The influence of internationalization on corporate
performance: a research on Chinese MNEs
Groningen, 08-08-2011
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Content
Abstract ...4
1. Introduction ...5
2. Theoretical Background ...9
2.1 The Relationship Between Internationalization and Corporate Performance ...9
2.2 MNEs From Emerging Market and Performance ...11
2.3 Chinese MNEs’ Processes of Internationalization and Current Condition ...13
2.4 Factors that Influence on Corporate Performance During the Process of Internationalization...14
2.4.1 Number of Countries that an MNE has Business Relationship ...15
2.4.2 Amount of Sourcing Abroad ...15
2.4.3 Foreign Sales Ratio ...16
2.4.4 Foreign Assets Ratio ...17
2.4.5 Institutional Influence (Ownership Structure)...17
3. Research Design ...21
4. Sample and Data ...21
5. Methodology ...23
5.1 Dependent Variable ...24
5.2 Independent Variable ...25
5.2.1 Number of Foreign Countries that an MNE has Business Relationship ...25
5.2.2 Amount of Sourcing Abroad ...25
5.2.3 Foreign Sales Ratio ...25
5.2.4 Foreign Assets Ratio ...26
5.3 Control Variables ...26
5.3.1 Firm Size ...26
5.3.2 Firm Age ...27
5.4Moderator Variable ...27
6. Empirical Results and Analysis ...28
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6.2 Amount of Sourcing Abroad and Corporate Performance ...29
6.3 Foreign Sales Ratio and Corporate Performance ...30
6.4 Foreign Assets Ratio and Corporate Performance ...30
6.5 Ownership Structure and Corporate Performance ...31
6.6 Firm Size and Firm Age ...31
7. Discussion ...32
8. Limitaitons ...34
9. Conclusion and Recommendations ...34
Acknowledgement ...37
References ...38
Appendix ...41
Table 1 Descriptive Statistics...41
Table 2 Model Summary ...42
Table 3 ANOVA Test ...42
Table 4 Correlations ...43
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Abstract
In today’s hyper-competitive business environment, internationalization is vital for success. China is widely considered as one of the most prosperous economy, and Chinese multinational enterprises (MNEs) frequently involve in the international business activities. This research investigates the influence of internationalization on the corporate performance of Chinese MNEs in 2010. Specifically, corporate performance refers to the return on assets (ROA), and four independent variables (number of foreign countries that a company has business relationship, amount of sourcing abroad, foreign sales ratio and foreign assets ratio) are included in this paper. Besides, one moderator variable and two control variables are taken into account to influence the relationship between internationalization and the corporate performance. Data were obtained from the annual reports of Chinese enterprises and the financial databases of China. Results from this experimental study indicate that internationalization can positively impact on the corporate performance of Chinese companies in 2010.
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1. Introduction
During last decades, the trend of internationalization has been becoming more widespread than before. As a result of this, it is believed that almost each country or region is involved in such a process of global expansion. Multinational enterprises (MNEs) from the developed countries, which enjoy sufficient advantages (technological knowledge, advanced managerial skills, etc.) compared to the counterparts in developing regions, are seeking new markets to enlarge their market share, establish their global image, etc. They successfully motivate the global growth contributed to their large international expansions. On the other hand, the MNEs of developing countries are also playing a crucial role of internationalization. Business entities from emerging markets perform especially well recently, and the emerging markets take up almost two-thirds of global growth. China is considered as a symbol of those economic groups, as China keeps the highest annual GDP growths after 1990. More and more Chinese companies actively participate in the global markets, and some of them have already had certain amount of subsidiaries all over the world.
6 operate. Agency cost might be enlarged due to the complicated corporate structure which often leads to inefficient and inaccurate communication within departments. Informational asymmetries would definitely lead to firm value decreasing for the MNEs. Furthermore, Doukas & Pantzalis (2001) point that there is relationship between agency cost of debt and global diversification of companies. More specifically, they have also found two opposite views on the result of that relationship. This is aligned with several scholars’ findings that internationalization can both create and decrease firm values by different aspects of influences.
7 the impacts of internationalization on firm value creation. Therefore in this paper, one research question could be formulated: To what extent the process of internationalization can influence on the corporate performance of Chinese MNEs, and what factors of being international can lead to the corporate value increasing or decreasing in the context of China? Thus the main research questions can be formulated as follows:
1) What is the relationship between internationalization and corporate performance? 2) What factors determine the corporate performance of Chinese MNEs when they
are active in the international market?
3) What is the impact of the institutional context on the relationship between internationalization and the corporate performance of Chinese MNEs?
8 crucial to the whole research.
Therefore, this research engages in providing useful information to the Chinese managers when they decide to expand internationally, as just a few researchers pay attention to the impact of internationalization on the firm value of Chinese MNEs. China is fast growing with a large number of Chinese companies being involved in the international market. Thus, it must be very interesting to know whether the Chinese MNEs increase or decrease the level of their corporate performance under the prosperous economic background of China, in 2010. In the case of a decrease, this paper will search for the ultimate reason and what factors making Chinese MNEs suffer from that. From the traditional perspective, internationalization is considered as a motivation to the value creation. However, it can also lead to a decreasing process of corporate performance. For instance, over-expanded size of companies shows a discount of firm value due to the more complex corporate structure, increasing agency costs, etc. This research will pay attention to this phenomenon which does not fully follow the traditional view of international expansion.
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2. Theoretical background
2.1 The relationship between internationalization and corporate performance
Past studies show mixed attitude towards the relationship between internationalization and corporate performance. However, many researchers are convinced that internationalization should positively influence on corporate performance, because it is believed that internationalization provides a lot of advantages to companies. Kogut (1985) argues that internationalization enables to boost corporate performance by increasing firm’s market power over its stakeholders overseas. Li & Tallman (1987) depicts that multinational companies should have advantage over non-multinational companies, since the theory of multinational reveals that multinational companies have opportunities to obtain more from their intangible resources. Furthermore, Burgers, Hwang & Kim (1993) point that international business helps diversify and reduce investment risks by means of operating in different countries.
10 be offered one more efficient management with respect to corporate know-how, reputation, marketing, etc.
However, there are also some conflicting findings regarding the relationship between internationalization and corporate performance. And the cost associated with being international can offset the gains from the international business. The theory of foreign direct investment tells that MNEs will encounter liabilities of foreignness and newness (Zaheer, 1995). The corporate managers will face a lot of difficulties and challenges when they decide to make a foreign investment, for instance, constructing new facilities, new recruitment and new business environment. The transaction cost theory and agency theory explain that the increasing complexity of organization can negatively influence on corporate decision making (O’Donnel & Roth, 1996). More specifically, firms can feel more difficult to process large amount of information, and the cost of organizational behaviour can also increase more. From the perspective of cultural issues, the level of internationality can increase the diversity of culture in one firm. Dechant & Robinson (1980) mentions that the diversity of culture within the organization can lead to several problems, such as communication, coordination problems.
11 represent firm values and the foreign sales to total sales to measure global diversification. Click & Harrison (2000) also find a discount at firm value using the proportion of foreign sales.
Figure 1
Multinationality and performance: A three-phase model
2.2 MNEs from emerging market and performance
12 disadvantages. Thirdly, international expansion can contribute to bypass international trade barriers. Lastly, the involvements in international business can alleviate domestic institutional constraints.
Contractor, Kumar and Kundu (2007) argue that the multinationals from the emerging markets are small, resource-deficient and distant from the major markets, for example, North America and Europe. All these suggest that the MNEs from emerging markets are less developed, especially in the management capabilities and decision-making processes (Baird & Lyles, 1994). In some Asian countries, a large number of companies are run by family. As to their home markets, they appear to be still smaller except China compared with developed countries. As a result of this, those companies operate their business in a small scale. Furthermore, emerging market firms operate in the high risky environment and are easily subject to those uncertainties that are difficult to prevent. Contractor et al (2007) further illustrate that these difficulties bring troubles to the MNEs when they decide to expand globally.
13 emerging economies, not all of them can survive in the fiercely competitive international market. Some consumers from developed countries do not trust the products and brands from emerging countries, and they often link those goods with low price and low quality (Aulakh, Kotabe and Teegen, 2000). They further point out that these negative perceptions make the companies from emerging countries difficult to construct their corporate images and brands.
2.3 Chinese MNEs’ processes of internationalization and current condition
This section will provide an overview of Chinese MNEs’ processes of internationalization from 1980 to 2010. Poncet (2003) researches the development of international integration China. Before the economic reform in 1978, China’s economy was characterized by an introverted development strategy. The political restrictions of the economy as well as the restriction of economic relations with the capitalist world make China not competent enough to compete in the international market. Moreover, Chinese government favoured a strategy of self-sufficiency. Inside the country, the emphasis was placed on self-reliance, and each regional government support itself with its own resources. The recognition of the economic inefficiencies and the waste of resources as a consequence from these introverted development policies led to the adoption of radical reforms starting in 1978. The promotion by the authorities of domestic openness alongside international openness was motivated by the search for more gains resulting from increased competition, the technological evolution and the determination of production according to comparative advantages. At the end of 1980s, the foreign business of Chinese companies increased due to the openness of Chinese government. Many scholars agree that the promotion of the international openness of Chinese provinces was a crucial factor of success.
14 However, a number of Chinese companies did not perform well at the end of 20th century. Child et al (2005) summarize that the problems often arose from a lack of strategic focus, fragmentation of many projects and inexperience of operating internationally. During the first decade of 21st century, a number of leading Chinese firms have begun to internationalize with a view to becoming global players in international markets. They are characterized by a more focused and longer-term strategic view and appear to be developing the ability to operate foreign affiliations systematically. At present, over fifty Chinese companies are shown in the list of Fortune 500 compared with the number, only one, at the early of 1990s. Besides, China has been becoming the largest exporters all over the world, and many Chinese small and medium enterprises (SMEs) have been frequently active in the international markets. A group of them, which operate business in the light industry, are born-global and solely focus on international trade.
2.4 Factors that influence on corporate performance during the process of internationalization
15 considered in this research since Chinese MNEs rarely employ foreign people as their regular employees no matter in foreign market or especially in China. At the end of this section, one conceptual model of this research proposal is given based on the main research question. After that, a set of hypotheses would be formulated in order to better respond to the main question in this research.
2.4.1 Number of countries that an MNE has business relationship
The number of countries that a company operates business is widely used as an important factor to represent the level of internationalization. In details, this number refers to any foreign businesses that a company is involved in, for instance, international trade (import or export), foreign subsidiaries, FDI, and so forth. One company scores more in this number, and it stands for a higher degree of internationalization to this company. At the same time, According to Pantzalis (2001), he mentions that the multi-nationality makes MNEs possess unique advantages that domestic firms do not have. For instance, MNEs have more freedom to operate businesses across borders compared with the companies that are limited in their domestic markets. However, international operations can also create additional administrative and agency costs (Allen & Pantzalis, 1996). The high degree of global expansion often incurs conflicts or tension between subsidiaries and headquarters.
Hypothesis 1:
H0: The number of countries that Chinese MNEs have business relationship is positively related to the corporate performance.
H1: The number of countries that Chinese MNEs have business relationship is negatively related to the corporate performance.
2.4.2 Amount of sourcing abroad
16 enable to reduce the costs of sourcing, improve the quality of materials and become more flexible when firms conduct their businesses abroad. At the same time, sourcing abroad is one way for a company to bypass the barriers set by local authorities. A suitable sourcing strategy could provide MNEs lower procurement costs, and improved financial performance. Besides, several scholars found a mixed relationship between sourcing abroad and firm performance, both positively and negatively. Kotabe and Swan (1994) find that offshore sourcing brought about greater market share.
Hypothesis 2:
H0: The amount of Chinese MNEs’ sourcing abroad is positively related to the corporate performance.
H1: The amount of Chinese MNEs’ sourcing abroad is negatively related to the corporate performance.
2.4.3 Foreign sales ratio
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Hypothesis 3:
H0: The proportion of Chinese MNEs’ foreign sales is positively related to the corporate performance.
H1: The proportion of Chinese MNEs’ foreign sales is negatively related to the corporate performance.
2.4.4 Foreign assets ratio
The level of net foreign asset is a key state variable in many open-economy models of growth and business cycles (Lane & Ferretti, 2001). Foreign capitals are assumed as a powerful motivation to local markets, especially to developing countries nowadays. However, according to Lane and Ferretti’s further research, they found that industrial countries as a whole had experienced a deterioration in their net foreign asset position during the last two decades of 20th century. Meanwhile, the Mexican crisis and Asian crisis in 1990s further weakened the role of foreign asset in developing countries. Eventually, they conclude that relatively few countries have maintained positive foreign asset positions throughout the research period of 1970-1998.
Hypothesis 4:
H0: The proportion of Chinese MNEs’ foreign assets is positively related to the corporate performance.
H1: The proportion of Chinese MNEs’ foreign assets is negatively related to the corporate performance.
2.4.5 Institutional influence (ownership structure)
18 institution is distinguished by different ownership structure within the company in this paper.
Demsetz & Villalonga (2001) depict that ownership structure is an endogenous result of decisions that represent the shareholders’ impacts on trading their shares in the market, as the diversified shareholders who pursue for maximizing their personal interests can bring various financial resource and expertise to the company. More specifically, the percentage of structure, which always refers to the right within the company, can result in different business behaviours and corporate performance. Meanwhile, Cho (1998) argues that ownership structure can affect on corporate performance by its influence on the investment. Some previous works empirically demonstrate the relationship between ownership structure and corporate performance (Jensen & Meckling, 1976/Stulz, 1988). On the other hand, governments also play an important role in corporate governance which can largely influence on corporate performance, and some companies from emerging markets are majorly under the control of government. According to Ang & Ding (2006), government is capable of showing its impact on the economic development by means of regulations and laws. For instance, taxation policy, employment policy, international policy and so on can largely influence the trend of the economy development.
Several scholars have found a positive sign of that relationship. McConnell & Servaes (1990) show that firm value is positively correlated with ownership by institutional investors for over 1000 firms. At the same time, Ang et al (2006) investigate Singaporean companies that are government-owned, and they research on how the main government holding company, Temasek Holdings, can impact on the corporate performance. They find that the companies with Temasek Holdings create more value than those without that kind of holdings, even though they had controlled several factors, such as profitability, firm size and industry effect.
19 China, and whether and how the performance of Chinese listed companies is influenced by the ownership structure. According to their research, they conclude that the performance of the Chinese companies with more legal person shares is better than those that are dominated by the state-owned shares. Firstly, they further mention that severe agency problems occurred from the separation of ownership and controls still exist in those companies that are partially owned by the government. Secondly, they explain that it is the insufficient resources and expertises in monitoring the management that lower the level of the corporate performance of the Chinese companies that state-owned holdings exist in.
Hypothesis 5:
H0: Ownership structure moderates the relationship between internationalization and corporate performance such that when the government has a large share the relationship between internationalization and corporate performance increases.
H1: Ownership structure moderates the relationship between internationalization and corporate performance such that when the government has a large share the relationship between internationalization and corporate performance decreases.
Based on these factors, one conceptual model of this research can be formed. As follows:
Foreign sales ratio
Foreign assets ratio
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3. Research design
This section examines the research design of the following main problem statement: How does internationalization influence the corporate performance of Chinese MNEs, and what factors can determine the performance of those MNEs? In order to analyze the influence of internationalization, I would like to use a multiple regression model to test the relationship between corporate factors associated with their global expansions during the process of internationalization and the performance of selected Chinese companies. This research is structured in the following order. Firstly, there will be an introduction about how to gather sample and data. Secondly, this paper examines the methodology of the research and formulates a basic research model to specify the research question. Lastly, the techniques used in this paper will be introduced and explained how to measure and analyze the data. The following sections will provide an insight in the methodological and analyzability of this research.
4. Sample and data
22 All the other information about the Chinese MNEs is secondary data, which are cited from the official website of the company, corporate annual report or financial statement, and the source of internet. From the annual reports of the listed Chinese MNEs, the specific numbers of financial statements could be gathered. All the data must be during the year of 2010. I will use the annual report in 2010 for each selected company.
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5. Methodology
The purpose of this research is to test the relationship between internationalization and the corporate performance of Chinese MNEs in 2010. The research model of this paper encompasses the dependent variables as well as the independent variables. The dependent variable is defined as the return on assets of the company, reflecting the corporate performance. The independent variables are consists of: (1) the number of countries that an MNEs operates business in, (2) amount of sourcing abroad, (3) foreign sales ratio, and (4) foreign assets ratio. These factors can represent the degree of how international Chinese MNEs are, and all of them are considered as the important factors that contribute to impact on the corporate performance. Besides, a moderator variable has also been taken into account in this research. The moderator variable named ownership structure is assumed to influence on the result between the dependent variable and the independent variables. Furthermore, two control variables (firm size and firm age) are considered. The conclusion of this research will then measure the variable with the most significant impact on the corporate performance of the company.
A multiple regression analysis is preferred in this research. Multiple regression analysis is used to assess the impact of internationalization on the corporate performance of a firm in the given time. The return on assets of the company is used in this research. To see what independent variable has the most significant impact on the dependent variable a multiple regression analysis will be conducted. The research equation is defined as:
ROAit = αi + β1NOCi + β2AOSi + β3FSRi + β4FARi + β5SIZEi + β6AGEi + ɛit (1)
ROAit = Return on assets of company i in period t
αi = The level of significance (5%)
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AOSi = Amount of sourcing abroad of company i
FSRi = Foreign sales ratio of company i
FARi = Foreign assets ratio of company i
SIZEi = Firm size of company i
AGEi = Firm age of company i
Β = Coefficients
ɛit = Standard error
In the model (1), the alpha represents the interception of the regression line with the Y axis, the betas are the coefficients of the independent variables, control variables and moderator variable. And the ɛ is the error variable. The next test includes a regression statistic, which determines the values of the R values and the standard error, and an ANOVA test, calculates the value of the coefficient and the corresponding T statistic and P value. The coefficients are tested by including the values of the T statistic and the P value. Each variable is explained in details as follows:
5.1 Dependent variable
Corporate performance (Return on assets)
25 financial statements. The collecting date is the last operating day of 2010.
5.2 Independent variable
5.2.1 Number of foreign countries that an MNE has business relationship
The number of foreign countries that Chinese MNE is active in are defined as any organizations that have business relationship in the foreign market (include Hong Kong, Taiwan and Macao). The more countries one Chinese MNE involving suggests that the MNE can be considered at a higher level of being international. The number of foreign countries can be obtained from the official website of respective Chinese companies. The official website of the company introduces its every organizational relationship both in the domestic market and the foreign market. Some websites are helpful to this research as well, since they provide the specific figures of international activities that the Chinese MNEs are involved.
5.2.2 Amount of sourcing abroad
The corporate financial statements reveal the specific figures of sourcing overseas or outsourcing. Generally speaking, not all the companies directly present their specific number of outsourcing in their annual reports. Under the condition of lacking of data, I get the amount of sourcing abroad by my own calculation. In the financial statement, the transaction details are given, as from where the company sourcing are presented in the report. Afterwards, the list of foreign companies (include Hong Kong, Macao and Taiwan) that have transactions with the sample company can be gathered, and then the specific number of the transactions is added together. The total number of this is the amount of sourcing abroad.
5.2.3 Foreign sales ratio
26 on foreign market. Almost all the Chinese companies directly describe their corporate performance in the international markets, and they publish the figures of that performance in their reports. Just a few Chinese companies only illustrate their total sales briefly in the introduction part of their financial statements. Under this condition, I use the number of total sales to minus all the sales from China mainland (exclude Hong Kong, Macao and Taiwan). Thus, the foreign sales ration can be obtained.
5.2.4 Foreign assets ratio
This variable refers to a fraction of total assets of the company. This variable ranges from 0 to 1. If one company own more assets across the boundaries, on the one hand, this demonstrates that the company pays more attention to global expansion. On the other hand, the higher foreign assets ratio means that the performance of this company is more likely to be influenced by the environment of foreign countries. For instance, the change of foreign currency exchange rate can positively or negatively impact on the accounting reports of the parent company. Besides, cultural and political issues in the foreign country can also be perceived as the negative factors that can probably increase the agency cost of the company. The foreign assets ratio is reachable in the annual reports. For those which do not mention the precise number of this ratio, I calculate this number manually by adding the total number of the foreign assets, as company shows all the information about its own foreign assets in the annual reports, e.g., foreign assets, invested projects and so on. At last, the ratio can be calculated as using that number to divide the total assets.
5.3 Control variables 5.3.1 Firm size
27 size. According to the characteristics of the sample, the number of total assets is more appropriate to this research, since the majority of the selected Chinese companies do not show any differences at the number of employees. Furthermore, the number of total sales cannot represent the overall differences between Chinese companies, because every year the general condition of each specific industry varies differently and cannot be guaranteed at the same level compared with the number of previous years.
5.3.2 Firm age
Firm age is the second control variable that is adopted in this master thesis. This control variable is used to control for any valuation effect associated with the firm age. Firm age is reported in the official website of the company. Besides, a set of professional websites also provide the basic information about when the company was established.
5.4 Moderator variable
Ownership structure
28 In order to measure the effect of the moderator variable, I include one variable MVi
which is calculated by multiplying all the independent variables by the variable STBi.
The method of obtaining the results of MVi is showed in model (2):
MVi = STBi * IVi (2)
In this equation, STBi refers to the percentage of governmental holdings in company i,
and IVi is the sums of all the independent variables of company i. Therefore, after
taking into account the effect of ownership structure, the multiple regression model of this research will be formed as follows:
ROAit = αi + β1NOCi + β2AOSi + β3FSRi + β4FARi + β5STBi + β6MVi + β7SIZEi +
β8AGEi + ɛit (3)
The P value of β6 will decide whether the variable STBi can be considered as a
moderator variable that can influence on the relationship between the level of internationalization and corporate performance for the Chinese MNEs. If the P value is statistically significant, STBi will be a moderator variable in this multiple regression
test.
6. Empirical Results and analysis
29 that this regression model is valid and applicable to be used to make the test. At the same time, Table 3 illustrates that this model explain more than 60% of the total variance in the return on assets for the Chinese MNEs (R2 = 0.602, adjusted R2 = 0.569). In other words, it means that this regression model fit the sample data. At the same time, table 4 illustrates the correlations among variables
In order to test the hypothesis, the coefficients of the regression model can be found from the Table 5, and five hypotheses can be answered by the regression outcomes. Besides, the governmental ownership in the company was assumed to influence the result about that relationship. Moreover, firm size and firm age are used to control their effects on the regression results. In the next paragraphs, I will respectively analyze and explain how the empirical results of the independent variables and the moderator variable plus the control variables effect on the dependent variable.
6.1 Number of foreign countries and corporate performance
The results in table 5 fully support the H0 of hypothesis 1, which depict a direct link between the number of foreign countries that Chinese MNEs have business relationship and the corporate performance (Return on assets). The findings show that the coefficient estimate for the Number of countries is positive and statistically significant (0.406; p = 0.01), which suggests that the sample companies are beneficial from the scale of international expansion. In other words, Chinese MNEs appearing in more foreign countries can lead to the increasing level of corporate performance. Thus, I can conclude that the figures of this regression test fully support the H0 in hypothesis 1 and reject H1.
6.2 Amount of sourcing abroad and corporate performance
30 independent variable - amount of sourcing abroad significantly influences on the corporate performance. It demonstrates that Chinese MNEs can acquire an increasing number of interests when they decide to source more from the international markets rather than solely rely on the domestic market. Likewise, the H0 of hypothesis 2 is completely accepted, and the H1 is rejected.
6.3 Foreign sales ratio and corporate performance
Surprisingly, the scores of this regression test do not support hypothesis 3, which points out that the foreign sales ratio of the Chinese MNEs has positive or negative relationship with the corporate performance. However, there is no evidence that can verify such relationship according to the p value of this variable (p = 0.974). There is one reason that can explain this problem is that the sample companies vary largely as to their basic operating strategy. During the data collecting period, some Chinese companies have been found that they pay little attention to the international market due to their large market shares in the domestic market. Consequently, foreign sales ration in this case is less effective on the corporate performance, and most of them were still thriving within the research period. Furthermore, the estimated parameter for this variable is only minus 0.004, which can be also considered as no effects on the dependent variable – the return on assets for the sample companies. To summarize, hypothesis 3 cannot be accepted by this research, and there is no relationship between the foreign sales ratio and the corporate performance for the Chinese companies in 2010.
6.4 Foreign assets ratio and corporate performance
31 variable, as Chinese companies may adopt different strategies associated with their global expansion. Therefore, there is no evidence to support hypothesis 4.
6.5 Ownership structure and corporate performance
According to the result in table 5, the variable moderator effect that represents the variable MVi is statistically significant (P = 0.059). Thus, the moderator variable STBi
is applicable in this multiple regression model. Interestingly, the result of the moderator variable in table 5 provide evidence to support hypothesis 5, which argues that the state-owned ownership in the Chinese MNEs moderates the relationship between their involvements in the international market and corporate performance. More specifically, I find that the state-owned holdings are negatively and significantly impacted on the correlation between Chinese companies’ commitments to the internationalization and the corporate performance. The P value is lower than 10%, and the coefficient estimate for the moderator effect is minus 1.631, which reveals that the more Chinese government owns within the company, the weaker the relationship between the level of being international and corporate performance becomes. In the discussion section, this issue will be further explained according to some specific information about Chinese management. Thus, it can be concluded that the H1 is accepted, and the H0 is rejected.
6.6 Firm size and firm age
32 international market.
7. Discussion
Overall, the results of the regression test indicate that the international business behaviour of Chinese manufacturing MNEs positively impacts on the corporate performance (Return on assets) in 2010. From the view of current statistic about the international trade of China, these results are consistent with the current trend of Chinese economy, since China has become one of the biggest economic markets and performed remarkably during the last decade. According to the empirical results, the corporate performance of Chinese MNEs is positively and significantly related to the number of foreign countries that one company has business relationship and amount of sourcing abroad. These results suggest that Chinese manufacturing companies in 2010 are beneficial from the international markets. The positive relationship between the number of countries and return on assets reveals that Chinese MNEs obtain benefits through global expansion. The growing scale of economies provides them an opportunity to reduce the cost of operating business and enlarges their market shares all over the world. Likewise, more and more Chinese manufacturing companies gain the bonus from sourcing the raw material abroad, importing mechanical equipments and so on. The increase of the amount of sourcing abroad for a company can lead to better performance. One reason may explain that the Chinese company with more expenditure on importing has advantage on negotiating with domestic producers, so that those companies get interests by decreasing the costs of sourcing. Attributed to the expanded business network, the managers from Chinese manufacturing companies are available to judge and compare different products that they need to purchase. Thus, they can make the optimal choice to benefit the company.
33 ratio cannot provide the evidence to signify any relationships in this paper. It is possible that the sample companies are not sensitive to the proportion of foreign sales due to the large market shares in the domestic market and the growing severance of the current economic recession. In a case of small or medium sized enterprises, they show an instable performance in the global markets, which are still under the downside economic trend. According to the numbers in this research, the revenues of some sample companies obtained from the foreign business shrink sharply between and 2009 and 2010, but their general performance are not influenced greatly. Even some of them earned more profits during the research period. Furthermore, the majority of Chinese manufacturing companies are less competitive than the ones from the developed countries, for instance, the U.S, U.K, Japan and so on. Therefore, Chinese MNEs would not like to bet all their corporate resources in the international markets and have to concentrate on developing and strengthening their own competitive status within the home basis. At the same time, foreign assets ratio which is also not significant in this research can be interpreted like that way. The features of Chinese manufacturing companies may explain this issue as they differently rely on the scope of international markets. Therefore, the research within one year cannot fully capture the accurate trend of that relationship, especially for the research on the performance of the overseas assets. But, the negative parameter of this independent variable suggests that some Chinese MNEs’ performances were weakened by the controls of foreign assets. As showed in the literature review part, the increasing foreign assets bring the company growing transaction costs and agency costs which make operators more difficult and tougher to manage their international businesses.
34 foreign business, thus they have ability to hedge the risk of any costs.
As to the moderator variable, this finding is opposite with the initial expectation of the moderator effects on the relationship between the independent variables and the dependent variable. It is believed that Chinese government plays a crucial role on controlling for the general development of Chinese economy, and especially Chinese authorities often involve in the process of policy making which always benefits the state-controlled companies first. To the contrary, the results of this research provide a negative sign of moderating effect, which demonstrates that the appearance of Chinese governmental holdings weakens the relationship between internationalization and corporate performance for the Chinese company. Based on the current global economy, Chinese government is probably aware of the shrinking number of international trade, especially the number of exporting which had ever motivated Chinese economy greatly. Therefore, the related authorities of China pay much more attention to regulate the international business behaviour in 2010, as Chinese government still owns relatively large shares in many sample companies.
8. Limitations
35 government, which can directly or indirectly impact on corporate performance in the short term.
Other limitation of this research is that some data of the samples are not available or missing mainly due to the transparency problem of Chinese companies. For instance, another control variable named the years of being international was supposed to be involved in this research. But, it was not applicable because of the limitations on searching for the accurate and reliable figures. At last, during the selected research period, the economy of China were enjoying a relatively prosperous time as the amount of GDP were keeping on increasing by nearly 10% annually. Consequently, the majority of Chinese MNEs can take the advantage of such trends to promote their own performance.
9. Conclusion and recommendations
36 are active in more foreign countries perform better than those that behave in smaller number of foreign markets. Besides, there is also evidence verify that the amount of sourcing abroad can promote the corporate performance. Despite that there is no evidence that can support any relationship between foreign sales ratio and foreign assets ratio and corporate performance, the empirical result still can demonstrate that internationalization can boost the corporate performance for the Chinese MNEs, especially during the research period, 2010. The finding towards the final problem indicates that the institutional issue (governmental ownership within a company) can weaken the relationship between the level of internationalization and corporate performance. This result shows that Chinese government plays a special role on managing the company when entering into the international market. Specifically, Chinese government seems to protect Chinese companies from the influence of international market, especially for those that are largely controlled by Chinese government. This may be true that Chinese authorities regulate tightly on the management of several core industries (resource exploration, telecommunication, electricity and so on). As a result, Chinese government intends to keep their controls on the companies which are crucial to the development of the whole country.
37 international. Therefore, the managers in some state-owned companies should be aware of the potential risk and cost of going into foreign countries.
For the further research, it is believed that covering more samples and longer research period can motivate the result of the related research topic. For instance, the future study can research on the performance of the sample companies around five years even more. The foreign sales ratio and foreign assets ratio may play a more important role in the long-term rather than concentrate on the short-term view. Another noticeable thing is that the future research can involve more companies from different industries rather than focus on one industry. It will be more significant to review the general performance for the majority of Chinese MNEs during the last decade, when China was growing magnificently. Last but not the least, the years of being international should be considered as a control variable to test its influence on the corporate performance, because this variable indirectly refers to the experience of conducting foreign business which may decide the corporate performance for Chinese companies. However, the difficulty of collecting these data is high as Chinese companies disclose little information on their past experience of operating abroad.
Acknowledgements
38
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41
Appendix
Table 1 Descriptive statistics
One-Sample Statistics
N Mean Std. Deviation Std. Error Mean
Return on assets 102 .069900 .0607560 .0060157
Number of countries 102 47.81 39.152 3.877
Amount of sourcing abroad 102 18150.97 76669.645 7591.426
Foreign sales ratio 102 .13556 .136104 .013476
Foreign assets ratio 102 .07984 .086208 .008536
State-owned blocks 102 .394475 .2496855 .0247226 Firm size 102 89205.89 208439.228 20638.559 Firm age 102 34.55 20.744 2.054 Moderator effect 102 11946.3960 61361.99500 6075.74286 One-Sample Test Test Value = 0 95% Confidence Interval of the
Difference t df Sig. (2-tailed) Mean Difference Lower Upper
Return on assets 11.620 101 .000 .0699003 .057967 .081834
Number of countries 12.334 101 .000 47.814 40.12 55.50
Amount of sourcing abroad 2.391 101 .019 18150.971 3091.62 33210.32
Foreign sales ratio 10.059 101 .000 .135561 .10883 .16229
Foreign assets ratio 9.354 101 .000 .079843 .06291 .09678
State-owned blocks 15.956 101 .000 .3944755 .345433 .443518
Firm size 4.322 101 .000 89205.892 48264.54 130147.24
Firm age 16.821 101 .000 34.549 30.47 38.62
42 Table 2 Model summary
Model Summary Model R R Squareb Adjusted R Square Std. Error of the Estimate 1 .776a .602 .569 .0607054
a. Predictors: Moderator effect, Firm age, Foreign sales ratio, Foreign assets ratio, State-owned blocks, Number of countries, Firm size, Amount of sourcing abroad
b. For regression through the origin (the no-intercept model), R Square measures the proportion of the variability in the dependent variable about the origin explained by regression. This CANNOT be compared to R Square for models which include an intercept.
Table 3 ANOVA test
ANOVAc,d
Model Sum of Squares df Mean Square F Sig.
1 Regression .525 8 .066 17.801 .000a
Residual .346 94 .004
Total .871b 102
a. Predictors: Moderator effect, Firm age, Foreign sales ratio, Foreign assets ratio, State-owned blocks, Number of countries, Firm size, Amount of sourcing abroad
b. This total sum of squares is not corrected for the constant because the constant is zero for regression through the origin.
43 Table 4 Correlations Correlationsa Return on assets Number of countries Amount of sourcing abroad Foreign sales ratio Foreign assets ratio State-owned
blocks Firm size Firm age Moderator effect
Std. Cross-product Return on assets 1.000 .696 .209 .565 .555 .609 .380 .682 .175
Number of countries .696 1.000 .158 .702 .737 .625 .303 .680 .120
Amount of sourcing abroad .209 .158 1.000 .298 .348 .326 .831 .119 .995
Foreign sales ratio .565 .702 .298 1.000 .731 .598 .365 .605 .251
Foreign assets ratio .555 .737 .348 .731 1.000 .597 .420 .590 .303
State-owned blocks .609 .625 .326 .598 .597 1.000 .515 .762 .303
Firm size .380 .303 .831 .365 .420 .515 1.000 .305 .841
Firm age .682 .680 .119 .605 .590 .762 .305 1.000 .088
Moderator effect .175 .120 .995 .251 .303 .303 .841 .088 1.000
Sig. (1-tailed) Return on assets . .000 .018 .000 .000 .000 .000 .000 .039
Number of countries .000 . .056 .000 .000 .000 .001 .000 .114
Amount of sourcing abroad .018 .056 . .001 .000 .000 .000 .116 .000
Foreign sales ratio .000 .000 .001 . .000 .000 .000 .000 .005
Foreign assets ratio .000 .000 .000 .000 . .000 .000 .000 .001
State-owned blocks .000 .000 .000 .000 .000 . .000 .000 .001
Firm size .000 .001 .000 .000 .000 .000 . .001 .000
Firm age .000 .000 .116 .000 .000 .000 .001 . .188
Moderator effect .039 .114 .000 .005 .001 .001 .000 .188 .
44 Table 5 Coefficients Coefficientsa,b Model Unstandardized Coefficients Standardized Coefficients t Sig. B Std. Error Beta 1 Number of countries .001 .000 .406 3.580 .001
Amount of sourcing abroad 1.744E-6 .000 1.480 1.806 .074
Foreign sales ratio -.002 .052 -.004 -.033 .974
Foreign assets ratio -.080 .090 -.101 -.884 .379
State-owned blocks .001 .023 .006 .052 .958
Firm size 1.391E-7 .000 .340 2.267 .026
Firm age .001 .000 .327 2.873 .005
Moderator effect -2.422E-6 .000 -1.631 -1.911 .059
