Institutional Factors, Firm-specific Capabilities, Internationalization and Performance - A Test Based on Chinese Manufacturing Firms

Abstract

The relationship between internationalization and performance is one of the most important and fundamental issues within the IB literature. However, in spite of the efforts and large amount of studies carried out during the past few decades, a limited consensus has been reached, and mixed findings have been reported. Related research is largely based on developed economies using an asset-exploiting perspective, which assumes the possession of competitive firm-specific advantages is a prerequisite condition for firm internationalization. Few studies have integrated institutional contexts into the internationalization-performance framework. In this study, we argue that the relationship formed between internationalization and performance in an emerging-economy context is different from the conventional wisdom used by the asset-exploration perspective. The unique idiosyncrasies of emerging economies, especially institutional factors should be taken into consideration. This study makes an attempt to examine the relationship between internationalization and performance based on emerging economy enterprises (EMEs), which provides a unique research setting and sheds new light on this relationship. The results, based on a longitudinal sample of manufacturing firms in China during the period 2007~2013, reveals a U-shaped relationship between internationalization and performance. In other words, Chinese manufacturing firms initially suffer from performance degradation when expanding into international markets up to a certain point, and recover with a higher degree of internationalization leading to benefits and a superior performance. In addition, we also tested the moderating effects of firm-specific capabilities and institutional factors on the relationship. Unlike firms from developed economies, we found that firm-specific capabilities (R&D and marketing capabilities) have no significant, or even a negative moderating effect on the internationalization-performance relationship. The high context-dependent nature of marketing knowledge, immature global strategy, and relative incompetence of EMEs are possible explanations. On the other hand, our results provide evidence that the institutional context plays an important role on the internationalization and performance relationship. The results show that the internationalization-performance relationship varies greatly depending on the governance structure. State-owned enterprise (SOEs) and firms with relatively dispersed ownership tend to perform better from internationalization. Findings in this paper also indicate that the effects of internationalization on performance are stronger in Eastern regions within a given nation, where the degree of marketization is higher and institutional environment is well-developed. Furthermore, the results show strong support for the positive moderating effect of an industrial-specific policy, suggesting that firms in industries with a supportive policy perform better than firms in other industries. This again emphasizes the role governments play in firms internationalization strategies. The incentives and special treatment largely enhances the competitive advantage of EMEs in global markets. In sum, the findings of this research provide support that firms from emerging economies such as China are different from those of developed countries. It also, highlights the important role of institutional factors play in driving EMEs to be profitable during internationalization.