The Relationship between DOI, Internationalization Process and Firm Performance

In the globalizing market, internationalization is one of the core strategies that influence growth and performance of multinational enterprises (MNEs). The growth through international expansion brings economies of scale and scope. However, it is also well known that the growth adds complexity to a firm which is usually difficult to manage. MNEs, hence, are often faced with the strategic dilemma in regard to the degree of internationalization (DOI). The effect of DOI on firm performance remains unconfirmed in spite of many attempts to empirically examine it. The inconsistent results can be attributed to the point that the relationship is much more complex and dynamic than thought so far. It can also be because the researchers have overlooked possible effects of the internationalization process. In other words, the performance of MNEs with the same DOI might be different if they have gone through different processes in implementing their internationalization strategies. Therefore, we focus on the three aspects of internationalization process; how rapidly an MNE reaches a certain DOI (speed), how broad the business in which the firm operates is (scope), and how regular and rhythmical the international expansion is (regularity). In this regard, this study was conducted with the following objectives; (1) to examine the performancerelated consequence of DOI, (2) to explore the moderating effects of the three variables associated with the internationalization process and (3) to provide a more integrative framework that guides toward the optimal DOI and directs the process in which MNEs attain the DOI. For this research, four hypotheses were developed. First, the relationship between DOI and firm performance is expected to be inverted U-shaped. However, the relationship can be affected by the speed of internationalization process. If the speed is moderate, the MNE can achieve more benefits from international expansion before reaching the optimal point of DOI and avoid the sudden decrease in profitability of further internationalization beyond the point. On the other hand, when the speed is too high, the MNE may obtain less benefits and suffer from greater costs of international expansion. In addition, the performance effect of DOI can vary with the business scope an MNE operates. Finally, the irregularity of internationalization process is expected to negatively moderate the relationship between the DOI and firm performance. In other words, it would be better to continue the gradual expansion within a proper period, pause while it is adapted, and re-expand before it forgets what it has learned rather than to reach a certain DOI through sudden expansion and continued non-expansion. The hypotheses were examined with the research sample of 218 manufacturing firms which were publicly listed in the Korean Stock Exchange as of March 2009. The result of regression analysis shows the U-shaped relationship between DOI and firm performance, i.e., firm performance declines to the optimal point of DOI but starts to improve beyond the point owing to the scale economies and the learning effect. However, this U-shaped relationship is shown to vary with the characteristics of internationalization process. First, the internalization speed moderates the relationship between DOI and firm performance positively. Before reaching an optimal point, the speedier the internationalization process gets, the more negative the effect of DOI on firm performance gets. However, once DOI exceeds the optimal level, the speedier the process is, the more positive the performance effect of DOI is. Regularity of internationalization is also shown to affect the performance-related consequence of DOI. As the internationalization process gets irregular, the effect of DOI on firm performance shifts from the U-shaped to the inverted U-shaped. With the sudden radical expansion and the long-term inactivity, an MNE recognizes some difficulties in absorbing the knowledge and exploiting it in other market entries. Despite the implications of the research results, this study cannot be free from limitations; the research data which cannot provide the detail information about foreign market entry order and business diversification of the sample MNEs, the measurement of DOI which does not consider other aspects of internationalization,and the measurement of firm performance focusing only on the financial dimension. More meaningful results are expected if future studies address the limitations.