Volume 2 Issue 2 - November 9, 2007
Effects of Firm Resources on Growth in Multinationality
Chiung-Hui Tseng

Institute of International Business, National Cheng Kung University
E-mail: ctseng@mail.ncku.edu.tw

This paper by Chiung-Hui Tseng, Patriya Tansuhaj, William Hallagan, an James McCullough appeared in the Journal of International Business Studies, 2007, Volume 38, Issue 6.

The extent to which business activities span across national boundaries, namely multinationality, is a critical decision confronting firms during the current era of globalization. Centered on the ongoing debate of whether benefits from foreign operations outweigh costs, previous studies have paid much heed to the consequences of operating abroad, notably the multinationality-profitability linkage. Such research has largely overlooked the antecedents driving multinational expansion.

Given the strategic importance of overseas expansion to firm growth, this lack of theoretical and empirical attention to the preconditions of multinationality seems particularly surprising. Managers at a firm aiming to expand through the international trajectory, for instance, would be bound to first find out “what determines how much further their firm can proceed internationally” and “why rivals show different pace of multinational expansion.” To address these intriguing but unanswered questions, we extend prior work by looking backwards at the antecedents affecting changes in multinationality. Building upon the resource-based view (RBV) of the firm, we argue that resource availability plays a pivotal role in determining a firm’s international growth.

Resources in this paper refer to the input factors that, if employed properly, impose positive impacts on firms’ strategies and business objectives. Given that resources embedded in organizations can range widely, to classify various firm resources into categories and systematically examine their influences, we divided resources into two kinds: knowledge-based resources (collective goods) relate to particular know-how and skills, and property-based resources (private goods) relate to specific and well-defined assets.

We developed a theoretical framework that consists of resource determinants of multinationality in the two categories. Empirical results obtained from a sample of publicly held U.S. manufacturing companies show that knowledge-based resources, including technological and marketing resources, generate faster and longer-lasting influences on international growth than property-based resources, such as slack as well as internally generated and externally raised financial resources.

Specifically, the results reveal at least four remarkable insights that constitute the major contributions of this study. First, the current research aids in understanding how individual resources stretch or contract a firm’s international growth. As far as technological resources are concerned, a firm’s technology profile has long been thought to play a key role in several international business issues, such as entry strategy and international performance. Our study adds to the literature by extending the efficacy of technological resources to the topic of multinationality. In regard to marketing resources, our finding provides an appropriate explanation for why some previous studies have disagreed about the usefulness of marketing resources in the international context by showing that an optimal level of marketing resources contributes most to international growth. In reference to organizational slack. We find that the best interest for a firm which aspires to expand abroad is to maintain an adequate level of slack. Excessive slack, to a large extent, signals managerial incompetence and sloth, thus dulling a firm’s initiative to expand their international operations. As to internally generated financial resources, they are demonstrated to be conducive to international growth, showing that it is important for firms who seek global expansion to maintain a greater level of return from current operations as the bedrock for marching overseas. In comparison, externally raised financial resources slow down multinational expansion, indicating that firms borrowing money from outside are bounded by capital costs and, to some extent, are dictated by the capital providers who attempt to keep firms away from perilous foreign operations.

Second, by classifying resources into two categories, we find that knowledge-based resources (collective goods) have more immediate and longer-lasting influences on international growth than property-based resources (private goods). Both knowledge-based resources are shown to have consistent, significant impact on the change in multinationality throughout all lag periods, whereas the effects of all three property-based resources do not appear in the no-lag model and have vanished in the three-year lag model. These findings affirm the intrinsic differences between the two strains of resources as defined in the theory development section, and lend support to the volume of international business literature that emphasizes the important role of knowledge-intensive inputs in foreign operations. In fact, it is conceivable that the effects of technological and marketing resources endure longer thanks mainly to their feature of permitting recurrent consumption (i.e., their present use will not inhibit subsequent consumption elsewhere). However, this collective-good characteristic is very likely to suffer from free-riding problems and requires firms to exploit the resources instantly before they are leaked to or imitated by other firms, thus contributing to international growth with little time lag. In addition, the zero-lag impact of knowledge-based resources also speaks for the possibility of a two-way causality, in which growth in multinationality motivated by knowledge-based resources may, at the same time, foster accumulation of the resources. In other words, a firm’s amassment of the resources and its increase in international involvement occur in tandem.

Third, this study contributes to the integration of the literature on international business and strategic management. Generally, international business research has suggested the complexity of foreign expansion for business organizations, whereas strategic management studies have buttressed the importance of the resource-based approach for corporate decisions. This study contributes to bridging these two strands of theoretical interests by showing how the intricate multinationality decision is affected by internal resource conditions. Furthermore, the current research extends the explanatory power of the RBV to geographical diversification, which, compared with product diversification, has received relatively less attention from the RBV theorists. Our results indicate that the theory is equally helpful in explaining a firm’s decision on the spread of geographical coverage across national borders.

Finally, this study has the potential to help decision makers understand the major internal forces driving international growth. This in turn can guide them in making the decisions of foreign expansion. Moreover, this study empirically demonstrates the usefulness of specific resources, such as technological resources, in supporting growth in multinationality. Managers striving for further international expansion would be wise to build a stronger inventory of knowledge-based resources that promote international growth.
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