Multinationality, R&D Intensity, and Firm Performance: Evidence from U.S. Manufacturing Firms

Multinational Business Review, Winter 2008 by Bae, Sung C, Park, Bell J C, Wang, Xiaohong

Abstract:

We examine whether firms' multinationality leads to better performance and what the role of R&D investment is in the multinationality-performance linkage. Unlike the previous studies, we employ both accounting- and market-based measures of firm performance for a large sample of U.S. manufacturing firms. Our results show that the empirical relation between multinationality and performance is not monotonic but varies with the phase of a firm's multinationality, starting with a negative relation initially, followed by a positive one, and then again a negative one. This horizontal S-shaped curvilinear relation of multinationality is more pronounced for the market-based performance measure and is supportive of the three-stage theory of internationalization. We also find that a firm's multinationality is related to greater firm performance when the firm possesses R&D investment, and that the effect of R&D increases with the extent of a firm's multinationality. These results lend strong support for the Internalization theory and the resource-based view of firms' international expansion. Our results are robust to different model specifications with an alternative measure of multinationality.

INTRODUCTION

As the world's economy becomes more integrated, an increasing number of U.S. firms expand their investments and operations internationally. According to the Survey of Current Business, by the end of 2006, U.S. owned foreign assets have reached more than $1.3 trillion with an increase of $320 billion in foreign direct investment. Yet there is a lack of consensus on how a firm's multinationality affects its performance. Extensive studies report inconclusive evidence on the effect of multinationality on firm performance, ranging from a positive and linear relation (Bodnar et al. 2003, Daniels and Bracker 1989, Geringer et al. 1989, Tallman and Li 1996) to a negative relation (Al-Obaidan and Scully 1995, Click and Harrison 2000) to a curvilinear relation (Contractor et al. 2003, Delios and Beamish 1999, Gomez and Ramaswamy 1999, Lu and Beamish 2004, Ruigrok and Wagner 2003) to no relation (Buhner 1987, Dess et al. 1995).

While the majority of previous studies on the effect of multinationality concern measures of multinationality and ignore firm-specific characteristics, some researchers consider firm capabilities such as R&D investment in their studies (Delois and Beamish 1999, Hitt et al. 1997, Kotabe et al. 2002, Morck and Yeung 1991). These studies, however, offer unsettled evidence on the role of R&D in the multinationality-performance linkage. This resource-based view of the firm postulates that besides the ownership, location, and internalization advantages of international expansion as advanced by the Internalization and Eclectic theories (Buckley 1989, Buckley and Casson 1976, Dunning 1977, Rugman 1981), firms' unique internal capabilities such as R&D investment will allow firms to achieve differential advantages in international markets.1 The debated issue is whether the degree of a firm's multinationality affects a firm's performance independently (e.g., Delios and Beamish 1999, Hitt et al. 1997) or whether multinationality has significant value only when firms possess firm-specific assets related to R&D investment (e.g., Morck and Yeung 1991).

In this paper, we examine two pertinent issues in the relations between multinationality, R&D investment, and firm performance. In particular, we investigate whether an increase in the degree of multinationality of a firm's operations leads to better firm performance and what the role of a firm's R&D investment is in the multinationality-performance linkage. Drawing from the Internalization and Eclectic theories and the resource-based view of the firm in the international business literature, we first develop hypotheses regarding the linkages among firms' multinationality, R&D investment, and performance. We then test the hypotheses by employing both the difference-in-means and medians tests and the multivariate regression analysis. Unlike earlier studies, we employ both accounting-based and market-based measures to gauge firm performance for a large sample of U.S. manufacturing firms during the 1997-2000 period.

We find that a firm's performance is in general positively related to its multinational involvement but that this relation is not monotonic; rather, it varies with the phase of a firm's multinationality. We observe the horizontal S-shaped curvilinear relation in a strong form when firm performance is measured by the market-based market to book value ratio. These findings provide empirical support for the three-stage theory of multinationality proposed by Contractor et al. (2003) and Lu and Beamish (2004). We also find that, consistent with the existing literature, a firm's R&D investment is significantly positively related to firm performance. More importantly, our regression results show that after controlling for size and risk, multinationality per se has little direct effect on firm performance. In contrast, multinationality is positively related to firm performance only when the firm possesses R&D investment, and the effect of R&D investment increases with the extent of a firm's multinationality. These results lend strong support for the Internalization and Eclectic theories and the resource-based view of firms' international expansion.