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Abstract
It is generally assumed that the performance of a firm improves with greater multinationality. Yet recent empirical studies have shown both a U-shaped relationship (which suggests an initially negative effect of international expansion on performance, before the positive returns of international expansion are realized) and an inverted-U-shaped relationship (which suggests that international expansion beyond an optimal level is again detrimental to performance, and results in a negative slope). This paper proposes a new unified three-stage theory of international expansion that incorporates both concepts in a sigmoid hypothesis. It then tests this on data from 11 service industries, highlighting the difference between knowledge-based and capitalintensive service sectors.
Journal of International Business Studies (2003) 34, 5-18. doi:10.1057/palgrave. jibs.8400003
Introduction
Is international expansion good for a firm?
The foundation of international business studies rests on the assumption that increased multinationality is good for a firm's performance. Vernon (1971) asserted a positive relationship between performance indicators such as return on investment (ROI) or return on sales (ROS) and the extent of multinationality of the firm. International expansion allows the firm to capture economies of scale, or geographic scope (Kogut, 1985). Dunning (1993) averred that less saturated foreign markets provide companies with the means to maintain and expand distribution and gain overall market share by exploiting their current stock of assets - that companies with valuable transaction-based ownership advantages (Or) can reap internalization benefits, circumvent market failure, and avoid trade barriers, moral hazards, and broken contracts.
Advantages of International expansion accrue by:
(1) Spreading common and central overheads over more and more nations: this is especially critical in R&D-intensive industries that require amortization of R&D from more than a few markets (Kobrin, 1991; Tallman and Li, 1996).
(2) Greater learning or international experience (Kobrin, 1991).
(3) Access to cheaper and idiosyncratic resources in foreign countries: these could include cheaper labor, better technology, or any countryspecific resource (Porter, 1990; Jung, 1991).
(4) The abilities of the multinational enterprise (NINE) for global scanning of rivals, markets, and other profit opportunities.
(5) Better cross-subsidization, price discrimination, and arbitrage potential with larger geographic scope.
In general, the greater the number of countries the MNE serves, the better its appropriability regime (Teece, 1986).
Thus core international business theory argues for a positive...