Is Regional Strategy More Effective than Global Strategy ...given that the influential works on international strategy (derived from the matrix of global integration and national responsiveness)

Is Regional Strategy More Effective than Global Strategy in the US Service Industries?Author(s): Lei LiSource: MIR: Management International Review, Vol. 45, No. 1, The Limits to Globalization andthe Regional Strategies of Multinational Enterprises (2005), pp. 37-57Published by: SpringerStable URL: http://www.jstor.org/stable/40836121 .

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mir Special Issue 2005/1, pp. 37-57 ^

mir monacjsniGiit International Review © Gabler Verlag 2005

Lei Li

Is Regional Strategy More Effective than Global Strategy in the US Service Industries?1

Abstract

■ This study examines performance implications of a firm's multinationality in the US service industries. It finds that home triad-based regional strategy is more effective than global strategy. It also partially supports the recently formalized three-stage proposition of international expansion.

Key Results

■ The whole sample analysis reveals a horizontal S-curved relationship between multinationality and financial performance.

■ However, the sub-sample analyses show that the U-shaped relationship between multinationality and financial performance appears to be prevalent for US firms in the service industries of high R&D and low capital expenditure intensity.

■ The home triad-region orientation has a consistently positive moderating effect on the relationship between multinationality and financial performance.

Author Lei Li, Assistant Professor of Management, Pamplin School of Business Administration, The Uni- versity of Portland, Portland, OR, USA.

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Introduction

The relationship between a firm's degree of multinationality and its performance (hereinafter referred to as M-P relationship) has been a core research issue in international management.2 Earlier studies showed that a firm's multinationality could be either positively or negatively or insignificantly associated with its performance (Vernon 1971, Siddharthan/Lall 1982, Michel/Shaked 1986, Grant 1987). However, recent research has consistently suggested that M-P relationship is non-monotonic (Daniel/Bracker 1989, Geringer/Beamish/DaCosta 1989, Ramaswamy 1995, Hitt/Hoskisson/Kim 1997, Gomes/Ramaswamy 1999, Lu/ Beamish 2001, Contractor/Kundu/Hsu 2003).

The central attention has now shifted to what kind of nonlinear curve deline- ates M-P relationship best. Some scholars embraced the Uppsala incremental internationalization model (Johanson/Vahlne 1977, 1990) in conjunction with Coasian transaction cost theory. They argued that firms would readily benefit from economies of scale, scope, and locations if they undertake their initial international expansion in a relatively homogeneous (i.e., institutionally and culturally proximate) business environment. Only when the firms enter distinctively different markets later on, would their performance be compromised because the increased environmental diversity and required organizational complexity would escalate corporate administrative costs. The empirical studies of these scholars showed that M-P relationship exhibited an inverted U-shaped curve (Daniel/ Bracker 1989, Geringer et al. 1989, Ramaswamy 1995, Gomes/Ramaswamy 1999).

Some other scholars, however, found a U-shaped M-P relationship (Ruigrok/ Wagner 2003, Lu/Beamish 2001). From an organizational learning perspective, they believed that firms would encounter a phase of "liability of internationalization"3 in which they would suffer from high adaptation costs. Multinational benefits would only become available after an accumulation of international experience.

In view of organizational evolution process, Sullivan (1994b) and Riahi- Belkaoui (1998) pointed out that the impact of internationalization on firm performance is an evolutionary upward trigonometric wave (i.e., horizontal S curve). They found that firm performance was negatively related to lower and higher ranges of multinationality and positively related to middle ranges of multinationality. Most recently, Contractor, Kundu, and Hsu (2003) have attempted to formalize this evolutionary process with a three-stage theory of international expansion.

Although our understanding of overall M-P relationship is enriched with these increasingly more sophisticated analyses, we know little whether and how a firm's international strategy affects M-P relationship. This omission is salient

38 mir vol. 45 • Special Issue • 2005/1



Is Regional Strategy More Effective than Global Strategy in the US Service Industries?

given that the influential works on international strategy (derived from the matrix of global integration and national responsiveness) were published more than a decade ago (Prahalad/Doz 1987, Bartlett/Ghoshal 1989). In a recent provocative book, The End of Globalization, Rugman (2000) analyzed the data of international trade and foreign direct investment (FDI) and illustrated that economic activities were, in fact, concentrated within each of the triad-regional blocks of North America, European Union, and Japan/Asia despite the fanfare of globalization. He further showed that few firms had a real global presence even among the world largest multinational enterprises (MNEs). Moreover, Rugman and his colleagues have asserted that successful MNEs now design strategies on a regional basis; unsuccessful ones pursue global strategies (Rugman/Hodgetts 2001, Rugman/Verbeke 2002). An empirical question can be raised here: Is a triad- based regional strategy more effective for an MNE than a global strategy? This paper seeks to answer this question. Specifically, it examines how a US service firm's home triad-region orientation or strategy affects the overall M-P relationship.

The rest of the paper is organized as follows. The next section provides relevant theoretical arguments and develops corresponding hypotheses. The third section introduces the data and methodology. The fourth section presents the major findings. The fifth section discusses the results and implications. The last section draws conclusions and points out some avenues for future research.

Theories and Hypotheses

The traditional foreign direct investment (FDI) theories (Hymer 1960, Vernon 1966, Caves 1971, Buckley/Casson 1976, Dunning 1977, Rugman 1981, Hen- nart 1982) emphasized the potential sources of multinational benefits such as the prospective market opportunities (e.g., Buehner 1987, Kim/Hwang/Burgers 1993), differences in national endowments (Porter 1990), economies of scale and scope (Ghoshal 1987), leverage of intangible assets (Hitt/Hoskisson/Kim 1997), operational flexibility (e.g., Kogut 1985), etc. Only recently have international management scholars started to embrace either institutional theory or organizational learning perspective, and pay keen attention to potential sources of costs of doing business abroad such as lack of local information, unfamiliar- ity with local culture, discriminatory treatment from host governments, customers and suppliers, increased coordination costs (Zaheer/Mosakowski 1997, Zaheer 1995, Eden/Miller 2001), learning costs (Sullivan 1994b, Ruigrok/ Wagner 2003), complexities of dealing with foreign exchange fluctuation and multiple host institutions (e.g., Sundaram/Black 1992, Kostova/Zaheer 1999),




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etc. Obviously, the magnitude and timing of various benefits and costs would determine the net impact of multinationality on a firm's performance along the path of international expansion.

One can imagine that firms have to change and adapt business systems or processes when they start to expand internationally. The home market oriented technologies, organizational structures, and operating routines are not usually easy to transplant to a foreign location without significant modifications. Struc- tural inertia (Hannan/Freeman 1984) or administrative heritage (Bartlett/Ghoshal 1989) tends to prevent firms from making rapid adaptation.

Service firms would expectedly encounter even tougher internationalization challenges than their manufacturing counterparts due to four distinctive characteristics: intangibility, inseparability (of production and consumption), heterogeneity, and governmental regulations (Boddewyn/Halbrich/Peny 1986, Campbell/ Verbeke 1994). Intangibility means that services are performances rather than objects, and they cannot always be seen and touched in the same manner as goods. Inseparability means that production and consumption of services often occur simultaneously so that services must be produced when they are required. Since services are consumed as they are created, there is a high level of buyer- seller interaction, and, thus a specific need for local responsiveness. Heterogene- ity means that services need to be created and delivered differently in order to meet each individual customer's needs. The governmental regulation is generally more stringent toward foreign providers of services.

The implications of these features for multinational benefits and costs are evident. Intangibility creates uncertainty for customers who require more information and communication before purchase. Moreover, intangibility, along with inseparability, makes standardization a challenging task. Thus, economies of scale and scope are difficult to achieve in delivering services internationally. Furthermore, heterogeneity also diminishes the economies of scope because un- like a specific technology, know-how and management expertise in services may not easily be fungible from domestic to foreign location and among different foreign locations (e.g., Anand/Delios 1997). Stringent host government regulations imply that additional costs would incur in dealing with local institutions and requirements.

Although the information technology and the ubiquity of English language facilitates general knowledge diffusion, it can hardly substitute for the need for experiential learning whereby service firms accumulate host location-bound knowledge and adaptation capabilities.

Therefore, even US service firms are not expected to avoid a phase of "trial and error" at the inception of internationalization. They have to experiment their new business systems in initial international ventures. Only after a phase of experiential learning may US service firms start to reap the benefits of economies of scale, scope and locations. Therefore:





Hypothesis la. Multinationality is negatively associated with performance for US service firms at the low degree of internationalization.

After the initial adjustment period of international expansion, US service firms are expected to gain increasing benefits for the following reasons. First, they can exploit the economies of scale by acquiring a significant market share via local sales or by effectively exercising purchase bargaining powers or internalizing intermediate product markets (e.g., Dunning 1993, Ch. 15). Second, they may gradually achieve economies of scope by capitalizing on firm-specific advantages (Rugman 1981) and sharing similar activities (Porter 1985). Third, managers may learn to explore operational flexibility among different locations (Kogut 1985). Fourth, firms may successfully go through a metamorphic trans- formation (Chandler 1962) from a domestic to an international firm and enter a period in which strategies, structures, processes and management capabilities realize a good match so that high managerial effectiveness can be achieved (Tushman/Romanelli 1985). Thus:

Hypothesis lb. Multinationality is positively associated with performance for US service firms in the middle range of internationalization.

However, this upward trend is not expected to last without a limit. As firms con- tinue to expand internationally, they will inevitably be present in diverse geographical environments. Moreover, as the scale and the number of foreign operations increase, internal structures and processes will also become more com- plicated. The dual complexity of external environments and organizational structures will start to escalate coordination and communication costs (Guisinger 2001), and stretch managers' execution capacity (Penrose 1959) and absorptive capacity (Cohen/Levinthal 1990). One can expect that performance of US service firms will start to decline beyond a certain degree of internationalization, mainly because the administrative costs will eventually compromise managerial effectiveness and nullify the benefits from economies of scale, scope and locations.

Hypothesis 1c. Multinationality is negatively associated with performance for US service firms at the high degree of internationalization.

Will a firm's international strategy impact this overall M-P relationship? More specifically, will a triad-regionally focused internationalization campaign alleviate the "liability of internationalization" and accelerate the realization of multinational benefits? Rugman and Verbeke (2002) enumerated four reasons to support a regionally responsive international strategy: (1) The "rules of engagement" may be different in each region. Intra-regional

information processing density permits affiliates to cope optimally with shared external circumstances;

(2) Customer requirements may vastly differ across regions depending upon the level of economic development and culturally determined preferences;




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(3) Region-based cluster requirements may impose specific types of behavior on firms in order for these firms to be perceived as legitimate within the context of regional clusters;

(4) Political requirements at the regional level are increasingly important with the regional cooperative agreements such as the North American Free Trade Agreement (NAFTA) and the European Union (EU).

The above four reasons are consistent with, and, indeed, complementary to the previously noted arguments regarding the potential sources of costs of doing business abroad (Eden/Miller 2001). The home triad-based regional strategy tends to minimize the potential disadvantages that a firm may be exposed to by constrain- ing the geographic reach and diversity of the firm's international activities. More- over, this strategy may facilitate the realization of economies of scale and scope by confining the transfer and utilization of intangible assets to a regional market that is physically and economically close to the domestic market. To a certain extent, the home triad-based regional strategy resembles the "related diversification strategy." Therefore, if US service firms concentrate their internationalization efforts on NAFTA or more broadly the Free Trade Agreement of the Americas (FTAA), they would be in better positions to reap multinational benefits.

Hypothesis 2. The interaction between home triad-region orientation and multinationality is positively associated with performance for US service firms.

Methodology

Data and Sampling

The data were extracted from the Standard & Poor's Compustat (North America) database. The final sample has 574 firms and 2091 observations. Table 1 shows the sample distribution by 3 or 4 digits SIC industries.

The sample was obtained through the following steps:

(1) The relevant annual data were extracted from the geographical segment files on all the firms in non-financial service industries (SIC code 7000 to 8800) from 1997 to 2001. 4

(2) The geographical dataset was matched with the data extracted from the business segment files and industrial files.

(3) As this study examines the impact of internationalization, the firms were excluded that never reported any significant values on foreign sales, foreign assets, and exports throughout the observation period (i.e., 1997-2001).





Table 1. Sample Distribution by Service Industries

SIC Code Industry Number of Observations

7000 -7100 Hotels and other lodging places 9 7310-7319 Advertising 33 7340 - 7349 Services to buildings (e.g., cleaning) 5 7350 - 7359 Equipment rental and leasing 48 7360 - 7369 Personnel supply services 69 7374 Computer processing and data preparation services 30 7370 - 7379 Computer related services 1394 7300 - 7399 (except 73 IX, Other business services 1 15 734X, 735X, 736X, 737X) 7510-7519 Automotive rental and leasing 24 7500 - 7600 (except 75 IX) Automotive parking, repair, and other services 5 7800 - 7899 Motion pictures 60 7900 - 7999 Amusement & Recreation 27 8000 - 8099 Health services 36 8200 - 8299 Education services 31 8710-8719 Engineering, architectural, and surveying services 16 8720 - 8729 Accounting, auditing, and bookkeeping services 11 8730 - 8739 Research, development, and testing services 48 8740 - 8749 Management and public relation services 53 7000 - 8800 (Other than Others 77 specified above) 7000 - 8800 Total 2091

(4) The firms were excluded that only reported aggregate foreign sales because it is not possible to identify their triad-region orientation.

(5) A decision was made to exclude the firms that exhibited extremely high degree of multinationality (i.e., the ratio of foreign to total sales is over 90%) at the time of founding or initial public offering (IPO), and were founded and/or headquartered outside of the United States. Those firms are basically "born global" (Knight/Cavusgil 1996) and do not share the home country characteristics with typical US firms even though they are traded in the US stock exchanges. Indeed, recent research has established the importance of home country environments for the performance effects of multinationality (Wan/Hoskisson 2003).

Measures of Variables

Dependent Variables

This paper chooses a widely used accounting-based performance measure, i.e., return on total sales (ROS). This measure largely reflects a firm's market operating efficiency. Two variants of this measure are used, i.e., gross ROS (i.e., ratio

mir vol. 45 ■ Special Issue • 2005/1 43



Lei Li

of income before interests, taxes and adjustments to total sales) and net ROS (i.e., ratio of net income to total sales). The distinction between gross ROS and net ROS can be significant because some international environment factors mainly affect net ROS rather than gross ROS such as tax regime, sophistication of local financial markets, etc.

Independent Variables

Multinational^ (MULTI) is measured with the ratio of foreign to total sales. Although sophisticated indices were explored (e.g., Sullivan 1994a), little clear advantages have been articulated for these indices (e.g., Ramaswamy/Kroeck/ Renforth 1996). Moreover, the data limitation prevents this study from using these indices.

Home triad-region orientation (HTriad) is measured with the ratio of sales in FTAA or Americas (excluding US but including Latin America) to total foreign sales. The higher the proportion of foreign sales is generated in Americas, the more a US service firm's strategy is home triad-region oriented.

Control variables

The following variables are often included in the research of M-P relationship (e.g., Hitt et al. 1997, Tallman/Li 1996). • Business diversity (BDIV): The entropy index based on business segment

sales, i.e., 2Z [BSP,- *ln(l/BSP,-)] where BSP, is the sales attributed to business segment i and In (1/BSP,) is the sales-based weight given to business segment i.

• Capital Expenditure Intensity (CEI): The percentage of total revenue used for additions to property, plant, and equipment, excluding amounts arising from acquisitions.

• Financial Leverage (FL): Ratio of debt to total assets. • Market Share (Share): Ratio of total sales of a firm to the aggregate total sales

of the primary industry in which the firm is involved. • Firm Size (Size): Logged total sales of a firm. • Superior Growth (Sgrow): 1 if the annual growth rate of total assets is above

20%; 0 otherwise. • Downsize: 1 if the annual reduction rate of total assets is above 20%; 0 other-

wise. • Industry control: Total 18 dummy variables (Others as the base). • Temporal control: Year dummies for 1998-2001 with year 1997 as the base.

Tablç 2 displays the descriptive statistics and Pearson correlation matrix of the major variables.





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Lei Li

Model specification

Since the panel data are to be analyzed, the potential heteroskedasticity between panels and autocorrelation within panels need to be taken into account. It has been established that Feasible Generalized Least Square (FGLS) regression is superior to OLS regression in analyzing panel data. This study adopts the two stage FGLS procedure in Stata 7.0 program, which is consistent with the well- noted Kmenta (1986) autoregressive-heteroskedastic model (e.g., Gomes/Ramas- wamy 1999, Contractor et al. 2003). The model is specified as follows:

PERFORMANCEu = ßo + ßxMULTIit + ß2(MULTIit)2 + ß3(MULTIit)3 + ß4HTriad + ß5HTriad * MULTI + IjYjCONTROL VARIABLEitj + eiu

Where PERFORMANCE is operationalized with Gross ROS and Net ROS; i stands for firmb t = 1997 to 2001; j stands for control variable j in the equation {i.e., BDIV, CEI, FL, Share, Size, Sgrow, Downsize, industry dummies, and year dummies); ß stands for the coefficients of independent variables (including the squared term, the cubic term, and the interaction term); y stands for the coefficients of control variables; e stands for the error term.

Results

Analysis of Whole Sample

Table 3 shows the regression results. Column (1) and (3) display the coefficient estimates without introducing "home triad-region orientation." We see that the linear term and the cubic term of multinationality are negative while the squared term is positive. All three terms are highly significant. This indicates that a firm's multinationality has a horizontally S-curved relationship with its financial performance. At a low level of multinationality, there is a negative internationalization effect on firm performance. With the increase of multinationality, a positive effect occurs. At a high level of multinationality, a negative effect appears again.

Column (2) and (4) show the results after "home triad-region orientation" is incorporated. Compared to column (1) and (3), the coefficient estimates for the linear, quadratic, and cubic term of multinationality maintain the same sign. They are all significant (albeit to a lesser degree) except for the cubic term of multinationality in column (2) which is nearly significant at 10% level. Thus, Hypothesis la, Hypothesis 1b, and Hypothesis 1c are largely supported regardless of the variable of "home triad-region orientation."5

46 '

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Table 3. Time Series Cross Section Regression Analysis (Feasible GLS)ft

(1) (2) (3) (4) Gross ROS Gross ROS Net ROS Net ROS

Constant -2.5*** (0.27) -0.97*** (0.12) -0.94*** (0.16) -0.92*** (0.16) Business Diversity -0.15*** (0.03) -0.12*** (0.03) -0.1** (0.04) -0.10** (0.04) Capital expendi- -4.7*** (0.17) .5.33*** (0.15) -4.6*** (0.17) -4.57*** (0.17) ture intensity Financial Leverage 0.14 (0.08) 0.10 (0.07) 0.04 (0.07) 0.03 (0.06) Market share -2.8*** (0.67) -2.88*** (0.47) -2.3*** (0.6) -2.35*** (0.57) Size (logged net 0.6*** (0.03) 0.28*** (0.02) 0.26*** (0.02) 0.26*** (0.02) sales) Superior Growth 0.06*** (0.02) 0.09*** (0.02) 0.07*** (0.02) 0.08*** (0.02) Downsize -0.14*** (0.02) -0.23*** (0.03) -0.28*** (0.03) -0.28*** (0.03)

Multinationality -6.4*** (0.6) -1.36* (0.55) -2.17*** (0.6) -2.03** (0.65) (Multinationality)2 16.2*** (1.5) 3.15* (1.44) 5.28** (1.67) 4.71** (1.68) (Multinationality)3 -10.5*** (1.1) -1.73 (1.08)f -3.3** (1.2) -3.01* (1.23) Home Triad-region -0.09(0.1) . -0.15(0.12) Orientation Multinationality*- 0.68* (0.30) 0.86* (0.36) Home Triad-region Orientation

No. ofObser- 2067 2067 2072 2072 vations Waldx2 2028.9*** 2358.84*** 1235.53*** 1170.68***

t p- value = 0.108 ft industry and year dummies are omitted * p<0.05; ** p<0.01; *** p< 0.001

Column (2) and (4) also show that although home triad-region orientation is not significant by itself, its interaction with multinationality is positively associated with a firm's financial performance. This result remains robust after drop- ping the main term of home triad-region orientation, the squared term, and the cubic term of multinationality either separately or collectively. Thus, Hypoth- esis! is supported. This indicates that a US service firm's home triad-region orientation has a positive moderating effect on its M-P relationship.

Figure 1 illustrates the effects of the interaction between a firm's home triad-region orientation and its degree of multinationality on the overall M-P relationship. As mentioned above, a firm's multinationality exhibits a horizontally S-curved relationship with its financial performance given all other factors being fixed. The solid curve in the graph illustrates the scenario in which home triad-region orientation (HTriad) takes the mean value of the sample. The first inflection point indicates that an average US service firm is likely to encounter a phase of performance decline prior to the degree of multinationality of 0.275. The second inflection point indicates that internationalization beyond the level of 0.77 may also hamper a firm's performance. The zone between the two inflection points may be interpreted as an "effective zone of internationalization."




Lei Li

Figure 1. An Illustration of Moderating Effects of Home Triad-region Orientation on Relationship between Multinationality and Financial Performance*

High Level Home Triad- region Orientation

i /'"' i ^^" 5 ,' I Average Home Triad- g ^s' ^ 4^^^^ region Orientation

£ /' / I Low Level Home Triad- | ^ s' / v l region Orientation

"[ _.--•■■■"' ] j

! I i I ! 0.23 0.275 0.30 074 077 0 82

Multinationality

I , I . p. J <q I I , , . p. <q ,

I « ► < « I 1 ► Effective Zone of + '

Internationalization t The horizontal axis represents the degree of multinationality (i.e., ratio of foreign to total sales);

The three curves and corresponding inflection points are depicted and calculated based on three scenarios: (1) Average Home Triad-region Orientation (HTriad) takes a mean value (i.e., average); (2) HTriad takes a value one standard deviation above the mean (i.e., high level); and (3) HTriad takes a value of 0 (i.e., low level) (Note: one standard deviation below the mean would become negative, which is not realistic.)

Since HTriad does not have a direct impact on financial performance, a change of HTriad would not change the magnitude of performance directly but adjust the slope (i.e., coefficient) of the linear term of multinationality, through which performance can shift upward or downward. The higher the HTriad, the more the slope of the linear term of multinationality would be adjusted upward. The implication is that a home triad-region orientation alleviates a US service firm's "liability of internationalization" (i.e., the extent of performance decline at the low level of multinationality) as well as enhances its performance given a certain degree of multinationality. Nonetheless, "liability of internationalization" will not completely disappear no matter how high a firm's home triad-region orientation may be. (Mathematically, we see that the absolute value of the coefficient for the interaction term is smaller than that of the coefficient for the linear term of multinationality. Since the value of HTriad is in the range of [0, 1], the ultimate slope of the linear term of multinationality is always negative.) The impact of HTriad is also reflected in the shift of the inflection points of the overall horizontal S curve. The higher the home triad-region orientation, the wider the





"effective zone for internationalization" would be. In other words, a US service firm that concentrates its internationalization efforts in the home triad-region (i.e., FTAA) would likely go through the phase of "liability of internationalization" sooner and enjoy the internationalization benefits longer.6

Some other results in Table 3 may be noted. Business diversity (BDIV) and Capital expenditure intensity (CEI) are negatively associated with performance. This seems to indicate that for US service firms, firm-specific advantages are not readily transferable across different businesses, and intensive investment in physi- cal infrastructure may not be conducive to operational effectiveness in international markets. Market share is also negatively associated with performance. This appears surprising but is not unconceivable because this measure does not take into account non-US competitors outside of the United States. Thus, it merely reflects the US ethnocentric market share rather than the global market share. The higher this market share, the more a firm may have developed its home market (location- bound) expertise which may compromise the firm's flexibility of adapting to international markets. A firm's size is positively correlated with its performance, which implies the importance of the economies of scale for US service firms. In addition, dramatic growth is positively whereas downsizing is negatively related to firm performance. This is not unexpected because good performance often drives a firm's growth while poor performance may force a firm to restructure and downsize.

Analysis of Sub-samples

Given that the firms in the industry of computer related services account for about two-thirds of the whole sample (see Table 1), one wonders whether the findings are biased toward a single industry. To find it out, the whole sample is divided into two subgroups. One subgroup consists of the firms in the computer related service industry. Another subgroup is made up of the firms in other service industries.

Table 4 and Table 5 show the regression results for the two subgroups re- spectively. It is evident that the hypothesis of horizontally S-curved M-P relationship is not supported by the subgroup analyses. For the subgroup in the computer related service industry, the U-shaped relationship is found while for the other subgroup, there appears to be no clear M-P relationship (only column (4) shows a negative relationship). This finding implies that M-P relationship likely varies from one type of industry or industrial sector to another.

Considering Contractor, Kundu, and Hsu (2003) finding that knowledge- based service industries and capital intensive service industries exhibit different forms of M-P relationship, one also wonders if there is any comparability between the industrial composition in this study and that in Contractor, Kundu, and Hsu (2003). A careful examination of the capital expenditure intensity shows




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Table 4. Time Series Cross Section Regression Analysis (Feasible GLS): Computer Related Service Industry^

(1) (2) (3) (4) Gross ROSa Gross ROSa Net ROSa Net ROS

Constant -0.4*** (0.07) -0.4*** (0.07) -0.25*** (0.07) -0.2* (0.09) Business Diversity -0.05* (0.02) -0.07** (0.02) -0.03 (0.03) -0.03 (0.04) Capital expendi- -6.7*** (0.3) -6.5*** (0.3) -6.0*** (0.3) -5.9*** (0.3) ture intensity Financial Leverage -0.01 (0.1) -0.01 (0.1) 0.2* (0.1) 0.22* (0.1) Market share -3.5** (1.3) -3.8** (1.4) -2.9** (1.0) -3.0* (1.2) Size (logged net 0.2*** (0.01) 0.22*** (0.01) 0.18*** (0.01) 0.18*** (0.01) sales) Superior Growth 0.08*** (0.02) 0.09*** (0.02) 0.08** (0.03) 0.07* (0.03) Downsize -0.2*** (0.03) -0.2*** (0.03) -0.43*** (0.04) -0.4*** (0.04)

Multinationality -1.2*** (0.3) -1.3*** (0.3) -1.2*** (0.3) -2.1** (0.7) (Multinationatíty)2 1.6*** (0.4) 1.5*** (0.4) 1.5*** (0.4) 4.0* (2.0) (Multinationality)3 -2.2(1.3) Home TViad-region -0.2 (0.15) -0.3 (0.2) Orientation Multinationality *- 1 . 1 * (0.5) Lit (0.6) Home Triad-region Orientation

No. ofObser- 1377 1377 1382 1382 vaüons Waldx2 856.32*** 850.33*** 818.95*** 669.28***

f p<0.10; * p<0.05; ** p<0.01; *** p< 0.001 tt Year dummies are omitted a t-test indicates that the cubic term of multinationality should be omitted

that the industries such as hotels and other lodging places, automotive rental and leasing, equipment rental and leasing, motion pictures, automotive parking are capital intensive (the average ratio of capital expenditure to sales is 0.41). The remaining industries have a low capital expenditure intensity (the average ratio of capital expenditure to sales is 0.09). Recent studies show that the former group of industries has a low R&D intensity whereas the latter has a high R&D intensity (Li 2003).

A regression analysis on the sub-sample of high R&D and low capital expenditure intensity is conducted with the results shown in Table 6.7 Column (3) in Table 6 shows that there is a horizontally S-shaped M-P relationship while the other three columns show that there is a U-shaped M-P relationship.

The analyses of sub-samples indicate that the interaction between home triad-region orientation and multinationality are consistently positive regardless of the form of M-P relationship, which means that the support of Hypothesis 2 is fairly robust. In addition, the coefficient estimates of capital expenditure intensity, market share, and firm size have the same sign and same level of signifi- cance as those from the whole sample analysis.





Table 5. Time Series Cross Section Regression Analysis (Feasible GLS): Service Industries Ex- cluding Computer Related Service^

(1) (2) (3) (4) Gross ROS Gross ROSa Net ROS Net ROS

Constant " -0.4*** (0.1) -0.37** (0.13) -0.38*** (0.1) -0.4** (0.1) Business Diversity

" -0.04* (0.02) -0.04+ (0.023) -0.03 (0.02) -0.04 (0.02)

Capital expendi- -0.36*** (0.1) -0.26* (0.11) -0.34*** (0.1) -0.4*** (0.1) ture intensity Financial Leverage 0.03 (0.04) 0.01 (0.03) 0.01 (0.04) -0.02 (0.03) Market share -0.91*** (0.24) -0.77** (0.28) -0.63** (0.24) -0.67* (0.3) Size (logged net 0.11*** (0.02) 0.1*** (0.02) 0.08*** (0.02) 0.09*** (0.02) sales) Superior Growth 0.01 (0.01) 0.01 (0.01) 0.01 (0.01) 0.01 (0.01) Downsize -0.15 (0.02) -0.01 (0.02) -0.02 (0.02) -0.03 (0.02)

Multinationality 0.04 (0.05) -0.31 (0.43) -0.035 (0.056) -0.17* (0.08) (Multinationality)2 0.64 (1 .2) (Multinationality)3 -0.49 (0.88) Home Triad-region -0.1 1* (0.05) -0.12* (0.05) Orientation Multinationality*- 0.44* (0.22) 0.6** (0.2) Home Triad-region Orientation

No. ofObser- 689 689 689 689 vations Wald/2 111.49*** 63.16** 61.46*** 63.58***

tt industry and year dummies are omitted a Although none of the multinationality terms is significant, the whole model becomes insignifi-

cant if the quadratic and cubic term of multinationality are omitted * p<0.05; ** p<0.01; *** p< 0.001

Discussion

This study shows that internationalization is associated with improved performance due to economies of scale, scope, and locations for a US service firm. But the benefits are gained only after a period of learning and knowledge accumulation in which the firm suffers a temporary setback of performance. Although the increase of performance is expected with continual internationalization, it may not last forever. There seems to be a "threshold of internationalization" (Geringer, Beamish, and DaCosta 1989) beyond which firm performance declines. This result is consistent with Contractor, Kundu, and Hsu (2003) recent findings for knowledge-based service industries.

However, the sub-sample analyses do not replicate this finding. Three points can be made here. First, dummy variables were used to control for industrial effects in the whole sample analysis. However, they could only affect the inter-




Lei Li

Table 6. Time Series Cross Section Regression Analysis (Feasible GLS): Service Industries of High R&D and Low Capital Expenditure Intensity^

(1) (2) (3) (4) Gross ROSa Gross ROSa Net ROS Net ROSa

Constant -0.34*** (0.07) -1.1*** (0.1) -1.1*** (0.2) -7.4(6.0) Business Diversity -0.02 (0.02) -0.1*** (0.02) -0.12*** (0.04) -0.26*** (0.03) Capital expendi- -5.8*** (0.3) -5.1*** (0.3) -4.2*** (0.34) -5.3*** (0.3) ture intensity Financial Leverage 0.03 (0.07) 0.06 (0.06) 0.006 (0.07) 0.02 (0.06) Market share -2.4*** (0.3) -3.6*** (0.5) -2.1* (0.9) -2.8*** (0.7) Size (logged net 0.18*** (0.01) 0.3*** (0.01) 0.3*** (0.03) 0.86*** (0.03) sales) Superior Growth 0.09*** (0.02) 0.1*** (0.01) 0.05* (0.02) 0.05*** (0.016) Downsize -0.2*** (0.02) -0.23*** (0.02) -0.28*** (0.02) -0.3*** (0.02)

Multinationality -0.96*** (0.2) -1.4*** (0.2) -2.8*** (0.67) -2.6*** (0.3) (Multinationality)2 1.2*** (0.25) 1.6*** (0.3) 7.2*** (1.7) 3.0*** (0.4) (Multinationality)3 -4.3*** (1.2) Home Triad-region -0.08 (0. 1 ) -0.24 (0. 1 7) Orientation Multinationality*- 0.86* (0.4) 1.8*** (0.5) Home Triad-region Orientation

No. ofObser- 1848 1848 1853 1853 vations Wald x2 1033.19*** 2670.3*** 575.39*** 1993.33***

tt industry and year dummies are omitted a t-test indicates that the cubic term should be omitted * p<0.05; ** p<0.01; *** p< 0.001

cept of the regression models. Thus, the analyses of the whole sample and sub- samples are likely to generate different results. Second, the form of M-P relationship is likely industry-specific. Industries differ in terms of business environments, competitive rivalry, maturity, globalization pressure, knowledge intensity, etc. Consequently, statistical distribution of firms' multinationality varies from one industry to another. The less mature and internationalized an industry is, the more likely there are few firms with a high level of multinationality. It appears that most of the service industries with high R&D and low capital expenditure intensity in this study (including the computer related service industry) have not internationalized for a long time. As a result, M-P relationship may not exhibit a complete S-shaped curve (Contractor, Beamish, and DaCosta 2003). Third, the whole sample panel data have more observations, more variability, and less colli- nearity than the sub-sample panel data (Kennedy 1998). Thus, it can be expected that the specific form of M-P relationship revealed from whole sample analysis may not be replicable in sub-sample analyses.

In summary, this study seems to provide only a partial support of the three- stage unified proposition of international expansion (Contractor, Kundu, and Hsu





2003). When home triad-region orientation is not considered, the horizontally S- curved M-P relationship is clearly revealed from the analyses of the whole sample (column (1) and (3) in Table 3) and the sub-sample of the industries with high R&D and low capital expenditure intensity (column (3) in Table 6). When home triad-region orientation is incorporated, only the analysis of the whole sample (column (2) and (4) in Table 3) reveals an S-curved M-P relationship. Instead, the U-shaped M-P relationship seems to be fairly robust and consistent. It is conceivable that the small number of service firms with a high level of multinationality makes the M-P relationship at the high range of internationalization (reflected by the cubic term) inconclusive.8

This study also indicates that for a US service firm, home triad-region orientation exerts a significantly positive impact on M-P relationship. High home triad-region orientation tends to shorten and alleviate a firm's "liability of internationalization" and likely postpone the advent of "threshold of internationalization." In other words, the more a US service firm is oriented toward its home triad-region, the sooner and longer it enjoys the "effective zone of internationalization". This finding has important managerial implications: (1) The economies of scale, scope, and locations tend to be more readily available in a U.S. service firm's home-triad region due to the market proximity and the trend of regional economic integration; (2) some US service firms may have to overcome a longer period of performance setback than others because of their preference of a global strategy instead of a home triad-based regional (or semi-global) strategy (Ghe- mawat 2003, Rugman/Verbeke 2003).

It may also be noted that the direct effect of home triad-region orientation is insignificant except for Table 5 (i.e., the analytical results of the sub-sample excluding computer related service industry). The significant and negative sign of home triad-region orientation in Table 5 was not expected. It seems that there is a negative correlation between a firm's home triad-region orientation and its performance at a low level of internationalization for some US service industries. With the increase of multinationality, the positive moderating effect of home triad-region orientation tends to exceed its negative direct effect.

Conclusion

This study makes four contributions to the research niche of M-P relationship. First, this is perhaps the first empirical study that explicitly examines how a firm's international strategy affects its performance along the internationalization path. Specifically, it finds that for US service firms, at least those in the industries of high R&D and low capital expenditure intensity, a home triad-based re-




Lei Li

gional strategy is effective and does enhance firm performance. To a large extent, this supports the triad-based regionalization perspective championed by Rugman and his colleagues (Rugman 2000, Rugman/Hodgetts 2001, Rugman/ Verbeke 2002). Second, this study helps enrich the recent theoretical thinking that emphasizes the "locus of destination" of geographical diversification (Ver- meulen/Barkema 2002, Rugman/Verbeke 2003). Third, with the rapid advance of communication technology and the increasing presence of international business activities, one wonders if the "liability of internationalization" is being largely mitigated or even eliminated or if the transfer of intangible assets and business practice is becoming easier. By using the latest data (1997-2001), this study shows that the "liability of internationalization" still exists despite the general environmental changes. Fourth, this study investigates a relatively large sample of US service firms, most of which are in the computer related service industry or other industries that are characterized by relatively high R&D and low capital expenditure. It provides a partial support of the recently formalized three-stage internationalization perspective (Contractor/Kundu/Hsu 2003).

This study has a few limitations. First, the sample of service firms has an unbalanced composition of industries. Although efforts were made to control for industrial effects and to conduct sub-sample analyses, the arguments and implications are likely more relevant to the firms in the industries of high R&D and low capital expenditure intensity than the firms in some other industries. In other words, the unequal representation of service industries in the sample is likely to affect the external validity of the results. Second, the home triad-region orientation is measured based on the assumption that North America and Latin America can be treated as a relatively homogeneous region. This assumption may be de- batable due to the apparent differences between North America and Latin Amer- ica. Nonetheless, considering the tendency of NAFTA's expansion into Latin American countries, it appears to be an acceptable assumption. In any case, a finer-grained treatment of home triad-region orientation separating the two regions would be better.9 Third, this study does not distinguish other international strategies in terms of bi-regional strategy, total global strategy etc. Substantial research endeavors are needed along this line to deepen our understanding of the performance implication of various international strategies.

This study is one of the few empirical investigations that test the emerging proposition of whether a regional strategy is more effective than a global strategy for MNEs or whether a regional strategy is the right international strategy to optimize the economies of scale and scope. There are many avenues for future research, among which two should be particularly noted here. First, there is a need to examine systematically the linkage between industrial characteristics and the effectiveness of a certain type of international strategy. For example, considering the substantial differences among various industries, is a regional strategy always more desirable than a global strategy for a service firm? Would the per-





formance implications of a regional strategy differ between manufacturing firms and service firms? Second, in-depth case studies on internationalization processes are needed to advance our understanding of the choice and implementa- tion of a regional strategy vis-à-vis other international strategies. There is a considerable room for extending Bartlett and Ghoshal's (1989) seminal works.

Endnotes

1 This study was partially supported by an Arthur Butine faculty development grant at University of Portland.

2 Despite a large number of empirical studies, no consensus has been reached. However, this study focuses on the effect of a firm's international strategy rather than tries to reconcile the existing findings.

3 "Liability of internationalization" is not equivalent to "liability of foreignness as used by Za- heer (1995) and Zaheer and Mosakowski (1997). The latter refers to the situation in which firms operating abroad face unavoidable costs that their local counterparts do not. The term used here addresses the situation in which firms will inevitably incur extra costs when they invest and operate abroad vis-à-vis operating in home markets.

4 Firms rarely specified the names of their reported geographical segments before 1997. Thus, the data before 1997 are not useful for the purpose of this paper.

5 The interaction term affects the overall M-P relationship. As will be shown later, however, the horizontally S-curved relationship holds for the whole sample regardless of the level of home triad-region orientation.

6 The data cover a period of five years in this study. Although five years might not be longitudinal enough, it is not believed to affect the appropriateness of longitudinal interpretations here.

7 The sub-sample of low R&D and high capital expenditure intensity accounts for about 10% of the total sample. The results from the regression analysis are very similar to those in Table 5, and thus are not reported here.

8 Less than 5% of the observations have a ratio of foreign to total sales of above 70%. 9 Due to the data limitation, this study could not separate the two regions without losing a large

number of observations.

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