performance following changes of international presence in ...

PERFORMANCE FOLLOWING CHANGES OF INTERNATIONAL PRESENCE IN DOMESTIC

AND TRANSITION INDUSTRIES

Will Mitchell, J. Myles Shaver and Bernard Yeung* University of Michigan

Abstract. We examine relationships between firm performance and changes in international presence in five medical sector industries between 1978 and 1989, conditioned on the international status of the industries and the market position of the firms. International expansion was necessary for survival when foreign firms began to enter a domestic market, but only firms with substantial market share and international experience, gained prior to the industry transition, could expand successfully. Operating only in the home market may permit a firm to survive in a primarily domestic industry, but moderate international expansion oRen brings current benefits and provides a base for future success should the industry become more global. However, expansion carries the risk of failure: firms that retrench after expanding internationally disappear.

Firms with extensive international operations often achieve superior performance [Morck and Yeung 19911, but international expansion may be risky. Mitchell, Shaver and Yeung [1992] found that firms that expanded in a global industry usually failed, where a global industry is one in which the “positions of competitors in . . . national markets are fundamentally affected by their overall global positions” (p. 275)‘ Several other studies have found that firms’ attempts to expand internationally often fail [Newbould, Buckley and Thurwell 1978; Bane and Neubauer 198 1; Mascarenhas 19921. Nonetheless, many firms become successful international competitors. There is a striking need to increase our understanding of the conditions that

*Will Mitchell is Associate Professor of Corporate Strategy, Myles Shaver is doctoral candidate of International Business, and Bernard Yeung is Associate Pro- fessor of International Business. All authors are in the School of Business Admini- stration at the University of Michigan. A nontechnical summary of this paper was presented at the 1991 meetings of the Strategic Management Society. Toronto, October 25, 1991 and subsequently published as ”Cambiare strategia intemazionale: Diffiicolti per le aziende nazionali, in transizione e globali,” in Maruizio Buss010 and Stefano Zara, editors, Cornpcrizionr nlulridittrrnsionalr: Qualc azirnda globale?, 2 11-34. Tmino. Italy: ISEDI, 1992. This paper was presented at the 1992 AIB meetings in Brussels. We appreciate comments received at both conferences. We are also grateful for comments provided by the referees of this journal and the encouragement of the editor, Paul Beamish.

Received: May 1992; Revised: January & April 1993; Accepted: April 1993

647

648 JOURNAL OF INTERNATIONAL BUSINESS STUDIES. FOURTH QUARTER 1993

help firms succeed or contribute to their failure following international expansion. In this paper, we examine the incidence of international expansion and retrenchment, along with the association between changed international presence and fm performance. We examine two types of industries: industries in which national markets consisted primarily of local competitors throughout the period of the study, and industries in which foreign firms began to take substantial positions in national markets. In the former industries, firms that possessed international operations had no average market share advantage over companies that were primarily domestically based. In the latter industries, by contrast, international operations began to be associated with greater market share during the study period. We refer to such cases as domestic and transition industries, respectively. The domestic and transition industry classifications undoubtedly mask many important nuances concerning changing competitive factors. Nonetheless, the categories are based on key differences among industries in the evolution of the advantage of international operations. Our study of the domestic and transition cases stands in contrast to earlier studies of expansion and performance in global industries, where many advantages of possessing international operations have been captured by firms that have already expanded. We expect expansion to be less risky in domestic and transition industries than in global industries. In contrast with studies finding that firms often suffer following international expansion, we predict that many companies will benefit following international expansion in domestic and transition industries, particularly in the latter case. To test the predictions, we examine thirty-five American firms operating in five medical sector industries between 1978 and 1989. Three of the industries remained primarily domestic throughout the study, while two began transition to global status. Following Mitchell, Shaver and Yeung [1992], we link changes in international presence with two measures of performance: survival and changes in the firms’ American market share. We condition our results on two distinctions: (1) industry status (domestic or transition), and (2) a firm’s 1978 market share position in an industry (leader or follower). Our results support an important and intuitive message. International expansion is necessary for survival when foreign firms begin to penetrate a domestic market, but only firms with substantial market share and international experience gained prior to the industry transition can expand successfully. A firm may survive by operating in a single national market in a primarily domestic industry, but moderate expansion is often beneficial to current results as well as providing the base for future success should the industry become more global. However, expansion carries with it the risk of failure: firms that retrench after expanding internationally disappear from the domestic market as well as the international market.

INTERNATIONAL EXPANSION AND PERFORMANCE 649

BACKGROUND

Benefits and Disadvantages of International Expansion

A large literature outlines potential benefits to international expansion. Internalisation theorists argue that firms expand globally in order to realise the value of intangible assets [Coase 1937; Hymer 1976; Caves 1971, 1982; Buckley and Casson 19761. Analyses of international strategy argue that firms may increase and leverage the value of assets by expanding globally [Vernon 1971; Dunning 1973; Porter 1980, 1986; Casson 1982, 1990; Kogut 1985; Prahalad and Doz 1987; Bartlett and Ghoshal 19891. Potential benefits of expansion include volume economies, intelligence gathering, product improvement, operational flexibility and stability, tax arbitrage, and organisational advantages [Hirsch and Lev 1971; Arrow 1975; Chakravarthy and Lorange 1984; Kogut 1985; Leibenstein 1966; Lessard 1979; Teece 1980; Harris, Morck, Slemrod and Yeung 19911. Firms that realise such advantages will achieve superior overall performance and will perform well in individual markets, including their own home market and key markets throughout the world.2 There are also many well-known disadvantages to international expansion and to major organisational change in general. Multinational firms usually are more difficult and costly to manage than companies that operate in a single country, so that benefits might not be realised if a firm’s managers cannot run a complex firm effectively (e.g., Newbould, Buckley and Thurwell [1978]; Caves [1982]). Transferring intangible assets is often costly and uncertain (e.g., Teece [1977]; Nelson and Winter [1982]), so that product development, production, and marketing cross-fertilisation among several national operations might not occur if organisational complexity creates confusion and management difficulties. Organisational inertia may disrupt attempts to change the structure of the firm [Hannan and Freeman 1977, 19891, while standard operating procedures and other organisational routines may be difficult and costly to change [Cyert and March 1963; Nelson and Winter 19821. The cultural diversity encountered when operating in several countries may create major problems of communication, coordination, and motivation [Hofstede 1980; Kogut and Singh 19881. The aggregate effect of such disadvantages sometimes may outweigh the aggregate advantages of international operation. Firm and environmental factors tilt the balance between the relative weight of the advantages and disadvantages of international operation. The internalisation literature suggests that firms possessing extensive stocks of intangible capabilities often can expand profitably [Morck and Yeung 19921. On the other hand, Mascarenhas [ 19861 suggested that nondominant firms may be able to pursue an international expansion strategy to avoid direct competition with industry leaders in their home markets. Ito [1988] found that follower firms in Japanese manufacturing industries sometimes outsell

650 JOURNAL OF INTERNATIONAL BUSINESS STUDIES, FOURTH QUARTER 1993

leaders in overseas markets. Recent empirical results suggest that the global status of the industry at the time a fm expands influences expansion success [Mitchell, Shaver and Yeung 1992; Mascarenhas 19921. In the following sections, we develop predictions concerning the effects of industry status and firm capabilities on expansion tendencies and post-expansion performance.

Measures of Success

We use survival and change in market share of business units in the US. market as our two measures of performance following changes in a firm's international presence. American performance is relevant because the U.S. is the home market for the firms in our study. It is a key market for the medical sector industries in our sample, being both the largest single market and the source of many technical advances. Market share is a common performance measure, while survival is of interest to shareholders, managers, workers, and communities. Both market share and survival complement profitability measures of performance, consistent with a growing recognition that managers must consider many criteria when evaluating the long-term potential of their businesses [Eccles 1991].3

Industry Status

Recent studies have begun to examine expansion in global industries, but have not systematically studied expansion in transition or domestic industries. Mitchell, Shaver and Yeung [I9921 found that increased international presence was often associated with lesser market share change and shorter survival in a key market of a global industry. Firms that expand in a global industry, besides having to overcome the intrinsic difficulties of expansion, encounter intense competitive pressure from already established multinational firms. The established firms have many advantages including ties with customers and suppliers, opportunities for cross-subsidisation and other retaliation, and control of key resources (e.g., see Hamel and Prahalad [1985]; Porter [1986]; Bartlett and Ghoshal [1989]). Many expanding companies will fail in industries where other firms already have realised most advantages of global operations.' We expect expansion to be more successful in transition industries than in global cases. Transition industries are those in which the advantages of international presence have only begun to emerge or, at least, to be recognised. Firms that are among the earliest to gain access to international technology, to position themselves in several markets with similar demands, and to create links to foreign governments and suppliers often benefit. The early- movers become the well-entrenched international competitors that put pressure on firms that expand only after the industry has become clearly identified as a global industry. We expect that many firms that expand in transition industries will achieve superior performance in their home markets5

INTERNATIONAL EXPANSION AND PERFORMANCE 65 I

Hypothesis 1 In transition industries, firms that expand intema- tionally will perform better in their home market than firms that do not expand.

We expect more firms to expand in transition industries than in domestic industries. In domestic industries, firms possessing international operations do not have advantages over companies that are primarily domestically based, so that international expansion is unnecessary. In transition industries, firms are motivated to expand because advantages of international operation are emerging.

Hypothesis 2 Firms are more likely to expand internationally in transition industries than in domestic industries.

Nonetheless, international expansion may still occur in primarily domestic industries. In many cases, a competitor in a primarily domestic industry may improve its home country performance by gaining focused access to international technology, labour, markets, tax arbitrage benefits, or other resources. Gaining access to such resources requires less encompassing expansion than in the case of a more broadly global industry. Moreover, because domestic industries contain few entrenched international competitors, attempts to undertake focused international expansion may not come under intense competitive pressure. We predict that international expansion will often be beneficial in domestic industries, but expect the advantages to be weaker than in transition cases.

Hypothesis 3 In domestic industries, firms that expand internationally will perform better in their home market than firms that do not expand.

Notwithstanding the previous hypothesis, we expect that firms that do not expand internationally in domestic industries will often survive because the relative stability of the environment matches the stability of the firms’ international presence. In transition industries, however, expansion may be necessary in order to adapt to the changing environment and many non-expanding firms will be outcompeted by expanding firms that captured the emerging advantages of international operation. We refer to cases in which a firm could expand but did not do so, electing instead to stay put. We expect firms that stay put will tend to survive in domestic industries but fail in transition industries.

Hypothesis 4 Firms that stay put in domestic industries will be more likely to survive than firms that stay put in transition industries.

In contrast with expansion and staying put, decreased international presence is likely to be associated with poor performance. Mitchell, Shaver and Yeung [I9921 found that decreased international presence was associated with

652 JOURNAL OF INTERNATIONAL BUSINESS STUDIES, FOURTH QUARTER 15’93

lesser market share and shorter survival in a key market of a global industry. Retrenchment handicaps a firm’s ability to compete with non-retrenching firms that are enjoying the emerging benefits of international operations. In domestic industries, retrenchment may indicate costly reversal of mistaken international expansion.E

Hypothesis 5 Firms that decrease their international presence in domestic and transition industries will suffer poorer home market performance than firms that do not decrease.

Market Position

In addition to the effects of industry status, we expect a firm’s position within an industry to influence expansion incidence. Intuitively, an industry leader is likely to have a stronger base than a follower from which to undertake expansion and so is more likely to expand. This assumption is consistent with the internalisation literature, which argues that large stocks of intangible capabilities such as R&D and marketing experience are the basis of profitable international expansion (e.g., Caves [1982]), because industry leaders usually possess larger such stocks than industry followers. Newbould, Buckley and Thurwell [1978] found that small British firms often failed when they expanded abroad. Case studies reported by Mitchell, Shaver and Yeung [1992] suggested that firms with strong U.S. positions may fare better than weaker competitors when they expand internationally in a global industry. Bane and Neubauer [I9811 found that international expansion by firms with strong industry positions was more likely to succeed than firms that carried out expansion in industries in which they had, at most, a minor position. Mascarenhas [1992] also found that prior strength contributed to superior performance following expansion.’

Hypothesis 6 Market leaders will be more likely to expand internationally than market f o l l ~ w e r s . ~

For this study, we define an industry leader as a firm with above-average market share in a national market, assuming that such superior performance results from superior firm capabilities. This assumption is consistent with the traditional results in Cournot (quantity) competition, where market share and competitiveness (lower marginal cost) are related [Tirole 19881.

Survival Incidence and Exit Type

The overall incidence of survival and the type of exit in domestic and transition industries is of interest because of the different evolution of the two types of industries. We expect survival to be more common in domestic industries than in transition industry cases. Transition industries are in a state of flux, with foreign competitors and home market firms jockeying to

UWEFWATIONAL EXPANSION AND PERFORMANCE 653

capture newly recognised or emerging international benefits. Firms that fail to change with the environment are likely to l o s e their ability to compete and exit the industry. By contrast, business viability usually is easier to preserve in the more stable environment of a domestic industry.

Hypothesis 7 Firms will be more likely to survive in domestic industries than in transition industries.

We expect that leaders will be more likely to survive than followers in transition industries, because the leaders will have stronger stocks of industry- specific resources from which to draw as the competitive nature of the industry changes. Any differences in survival tendency will tend to be weaker in domestic industries.

Hypothesis 8a Market leaders will be more likely to survive than market followers in transition industries.

Hypothesis 8b There will be no difference in survival tendency of leaders and followers in domestic industries.

Finally, we expect the incidence of types of exits to differ in domestic and transition industries. A firm may exit its business by dissolving its business or by selling it to another firm. Dissolution will tend to occur when a business fails so completely that it has little organisational value to other companies. By contrast, acquisition exits will be more common when firms possess valuable but incomplete sets of organisational systems that may have greater value if coupled with other organisations [Mitchell 19921. A business's assets are likely to retain their value in the relatively stable environment of a domestic industry, so that an exiting business is likely to be acquired by a competitor. Because the terms of competition often change drastically in transition industries, by contrast, the assets of a failing business may have little worth to a competitor.

Hypothesis 9 The incidence of business dissolution will be greater in transition industries than in domestic industries.

An alternative outcome in the transition cases is that foreign firms may acquire American companies as a means of expansion into the U.S. markets. Therefore, we will distinguish empirically between acquisition by American and acquisition by foreign firms.

MEDICAL SECTOR DATA AND VARIABLES

We examine changes in international presence taken in five medical sector industries by thirty-five American firms operating in the United States between 1978 and 1989. The five industries included intravenous solutions, implantable heart valves, neurostimulaton, needles, and pacemakers. These industries are subject to similar economic and environmental changes because they are in the same economic sector, so that observed variations can be attributed


to industry-specific factors. We obtained the information for this study from a series of medical sector trade guides [Hale and Hale 1978, 1983, 1986, 19891 and selected industries in which the product classifications remained stable throughout the study period. Table 1 lists the industries and summary statistics.

Domestic and Transition Industries

To operationalise the concepts of domestic and transition industries, we defined domestic industries as those with few foreign participants and low foreign share throughout the period of the study. In turn, we defined transition industries as cases that began the study period with little foreign presence but experienced notable increase in number or share of foreign participants during the period. We recorded the number of foreign-owned participants and the aggregate foreign market share in the five industries at the beginning and end of the study period. In 1978, the majority ownership of nine of forty-four incumbents was foreign (mainly European) and the aggregate share held by foreign manufacturers in each industry ranged from less than 1% to 13%. By 1989, about fifteen foreign-owned firms were participating in the American markets of the five industries and the aggregate foreign-held industry share ranged from less than 1 % to about 50%. We used this information to assign domestic and transition status for the five industries. The classification of industries is somewhat arbitrary but is a reasonable guide for this exploratory analysis. As indicated in part A of Table 1, intravenous solutions, implantable heart valves, and neurostimulators remained domestic industries throughout the study. In 1978, each of the three industries had only one foreign-owned participant. The foreign participants in intravenous solution and heart valve held notable market share in 1978 (10% and 13%), but the share held by leading American players was substantially higher in each case. By 1989, the number of foreign-owned participants had grown slightly but their aggregate share was negligible in all three industries (less than 5 % ) . Therefore, we classed all three cases as domestic industries during the study period. Part A of Table 1 also shows that the pacemaker and needles industries undertook transition from domestic to global during the period. Most notably, the American market share held by foreign participants in the pacemaker industry increased markedly during the 1980s, from 9% to about 50%. The transition was less substantial in the needles industry, where the number of participants rose from one to three and the foreign-held share rose from 3% to 10%. However, the fact that both participant number and aggregate foreign share rose in the needles cases led us to classify it as a transition industry during the study period. We assumed implicitly that the value of international operation was marginal in domestic industries and did not change in our sample period, while in


TABLE 1 Domestic and Transition Industries

in the Medical Sector, 1978-1989

A. Categorical classification of domestic and transition Industry

US. Firms Foreign Firms in the U.S

1978 1978 1989 No. No. (share) No. (share)

Domestic industries intravenous solutions 4 1 (10%) 4 (<5%) Heart valves 8 1 (13%) 1 (<lo/) Neurostimulators 5 1 (<1%) 1-3 (<5%) - -

17 3 Transition industries

Needles Pacemakers

8 1 (3%) 3 (10%) 10 5 (9%) 5 (-50%) - - 18 6

6. OLS estimates of effects of intcrnstlonai status on U.S. firms’ market share In 1978 and 1989 @-value in parentheses)

Variables and Coefficient Values

Intercept YEAR MNE YEARxMNE Industry (a) 0 1 ) (02) (03) edj R2

Domestic ,133 -.048 .055 ,11 1 ,198 (37 firms) (.0001) (242) (.410) (.188)

Transition ,113 -.076 -.064 ,265 ,151 (28 firms) (.002) (.281) (.367) (.021)

transition industries the value of international operations increased to a non-trivial level during the period. In order to check the assumption, we regressed the market share held by every US.-owned participant in 1978 and 1989 on 0-1 dummy variables indicating the year and each firm’s multinational presence. The OLS regression equation was specified as

where a is an intercept and E is an error term. The sample included all U.S.-owned members of the five industries in the 1978 (thirty-five businesses) and 1989 (thirty businesses) observation years. M S recorded each participant’s market share in the observation year. YEAR was equal to 1 if the observation year was 1989 and 0 if 1978. MNE was equal to 1 if the firm had extensive international presence in the observation year and 0 other- wise! The third independent variable is the product of the YEAR and MNE measures. Domestic industry status will be marked by nonsignificant values of the p2 and p 3 terms, indicating that international presence contributed no


market share advantages in either 1978 or 1989. Transition industry status will be marked by a nonsignificant fi2 and a positive and significant &, indicating that international presence contributed market share advantages in 1989. The results support our assumption, as we report in part B of Table 1. In the domestic industries, the effect of international on market share remained insignificant throughout the period, as shown by the high p-values of the MNE and Y E A R x M N E coefficients. In the transition industries, by contrast, the effect of extensive international presence on market share changed from being insignificant in 1978 to being positive and significant in 1989, as shown by the p-value of the YEAR xMNE coefficient. For presentation clarity, we pooled the firms in the domestic and transition cases that we identified in part A of Table 1. The results obtained separately for each individual domestic industry and for each individual transition industry were qualitatively similar to those reported in part B of Table 1.

International Presence

We used the medical sector trade guides, which report several major aspects of the international presence in the medical sector of the corporate parent of the business unit, to construct variables describing the international presence of the firms participating in the five industries. For corporations with medical sector participation in only one industry, the variables are identical to industry-specific international presence. For firms that participate in several medical sector industries, the variables record corporate strength and weak- ness in the international medical sector. We measured medical sector international presence at the corporate level because it is difficult to separate corporate international strategy from individual business actions, both conceptually and empirically. Major corporate changes in medical sector international presence are likely to influence all medical businesses in a company. R&D practices, for instance, tend to have strong corporate components [Scott 19841. Establishing a major corporate- owned distribution system in Europe or Japan, as another example, will draw resources from most or all medical sector businesses and provide direct or indirect services to them. Mitchell, Shaver and Yeung [ 19921 found similar effects of international expansion on corporate-level and business- level performance. Although some individual businesses will be insulated from corporate changes, most such insulation will cause random error rather than systematic differences. The trade guides classify medical sector companies in four relevant categories of international presence for the years 1978, 1983, 1986, and 1989. Part A of Table 2 lists our 1978 presence classifications and the international status categories used in the guides. The trade guides assign four relevant statuses: domestic-only, exporter, overseas manufacturer, and multinational.” We considered exporter and overseas manufacturer (which are not mutually

INTERNATIONAL EXPANSION AND PERFORMANCE

TABLE 2 international Medical Sector Presence Variables

A. 1078 Presence

International Slatus Description 1. US-only Domestic-only No significant internalional activity

2. Midrange Exporter and/or overseas Export from US.

3. MNE Multinational Extensive international activitv

manufacturer Own manufacturing facilities outside US.

6. Change in Presence after 1978

Description 1. Increase internalional presence Become Multinational

or Start overseas manufacture or Start exporting’

2. Decrease international presence Cease to be Multinational or Stop overseas manufacture or stop exportingb or Become domestic-only

‘“Start exporting” was in increase only if a firm did not cease to be an MNE or an over-

b“Stop exporting“ was a decrease only if a firm did not become an MNE or begin over.

Sources: Hale and Hale [1978, 1983, 1986, 19891.

seas manufacturer.

seas manufacture.

exclusive) to be “midrange” international presence. We classified domestic- only and multinational status as “U.S.-only” and ‘“NE” presence, respectively. The guide classifications also served as the basis of the study of expansion incidence. We tracked the thirty-five American-owned firms that participated in the industries during 1978 over time by noting any changes in the international status classifications that were recorded in directories after 1978. As reported in part B of Table 2, we used the change record to identify firms that increased or decreased their international presence after 1978. We accorded increased international presence to firms that became multinationals, set up overseas manufacturing operations, or started exporting. We denoted decreased presence for firms that lost multinational status, stopped overseas manufacturing, stopped exporting, or became domestic-only participants. Undoubtedly, these changes do not record all variations in international presence undertaken by the medical sector firms in our sample, so that we cannot systematically identify incremental changes in aspects of international operations such as importing, exporting, manufacturing, acquiring foreign firms, setting up new ventures, and joining alliances. Although identifying incremental changes would increase the richness of the analysis, the measures


of substantial adjustments that are contained in the trade guides are appropriate for our study. For the survival analyses, particularly, such quantum c h a n g e s s u c h as going from having no substantial overseas manufacturing presence to setting up a f i rs t manufacturing facility outside the United States-are likely to have particularly strong effects on performance. Table 3 summarises the 1978 status of the thirty-five firms and the changes we found in their international presence during the following eleven years. Column 1 lists the number of 1978 American market leaders and followers in each type of industry. W e classified leaders as firms with market share greater than or equal to the industry mean in 1978 and followers as competitors with less than average share. Columns 2 through 4 of the table report the international presence of the firms, noting that six (17%) of the thirty-five American-based firms were MNEs, fifteen (43%) had midrange presence, and fourteen (40%) had only U.S. operations. We used the information summarised in Table 3 to test Hypotheses 2 and 6.

Change, Survival, and Market Share

Table 4 reports the incidence of changes in international presence taken by the firms during the study period, along with their survival frequency and market share changes. Column 1 reports the total number of firms present in 1978, differentiated by industry type and firm type, as well as the number of firms that survived until at least 1989. Column 2 reports the number of firms that increased their international presence between 1978 and 1989, as well as the number that survived and the average market share change of the survivors between 1978 and 1989. Columns 3 to 5 report the number that did not change their international presence during the period, along with the number of survivors and market share change. The “no change” firms are categorised according to their international status in 1978: MNE, midrange, or US.-only. Column 6 reports the number of firms that decreased international presence. Column 7 calculates the number that could have increased their presence, which is equal to total firms (column I ) minus those that held MNE status in 1978 (from Table 3). Column 8 calculates the number that could have increased but did not, which is equal to possible increases minus those that did increase (column 7 minus column 2). Column 9 calculates the number of firms that could have decreased their presence, which is equal to the total firms (column 1) minus those that held U.S.-only status in 1978 (from Table 3). Column 10 calculates the number that could have decreased but did not, which is equal to possible decreases minus those that did decrease (column 9 minus column 6) . We used the information in Table 4 to test Hypotheses 1, 3, 4, and 5. Table 5 presents information concerning the number and types of exits that occurred in the domestic and transition industries. Column 1 in Table 5 notes the number of firms, differentiated by industry type and firm type. Columns 2 and 3 report the number of firms that survived and exited by


TABLE 3 international Presence of U.S. Firms in 1978,

Domestic and Transition Industries

international Presence

Total Firms MNE Mldrange U.S.-only (1 1 (2) (3) (4)

Domestic indUBtrieB 1978 market position Leaders 9 1 5 3 Followers 8 2 2 4

All firm8 in domestic industries 17 3 7 7 - - - -

Trnnnition industries 1978 market position Leaders 7 0 5 2 Followers 11 3 3 5

All firms in transition industries 18 3 8 7 - - - -

Total 35 6 15 14

1989, respectively. Columns 4 to 6 distinguish among types of exits, including business dissolution, acquisition of an ongoing business by an American- owned firm, and acquisition by a foreign firm. We used the information in Table 5 to test Hypotheses 7, 8, and 9.

RESULTS

We tested the hypotheses based on nonparametric probability distribution statistics.” In examining the difference in survival incidence between expanding and non-expanding firms, for example, we formed a 2x2 contingency table with the first and second column being expanding and non-expanding firms and the first and second row being the surviving and non-surviving firms. We then tested the difference in the survival distribution between the two columns based on Fisher exact statistics [Brownlee 19651 and conditional probabilities. The techniques are more appropriate than chi-square goodness-of-fit tests owing to the low incidence of cases in some cells of the contingency tables. For the contingency tables, the Fisher exact test is identical to a nonparametric test of whether the distribution of the observations across the two columns is random. From this perspective, we also created a conditional probability by starting with the empirical distribution in one column and determining the probability that the distribution in the other column came from the same probability distribution. Columns 2 and 3 of Table 6 report the Fisher exact and conditional probabilities for the hypotheses, which are summarised in column 1 of the table.12

TABLE 4 Incidence and Effects of International Presence Change, 1978-1989

Change in lnternatiiai Presence, 1978-1989

No Change (1978 Status) could CCUkl Firm and Industry Total Firms Increase (MNE) (Mid) (US) Decrease I n m w * but Di Not kmases ' but Did Not

Possible lnaease PossiMe Decrease

Row Categories (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

Tnnsltlon industries l a All 1978 firms 18 2 2 5 7 2 15 l b Survive I C Survivors' share change

2a All 1978 firms Domestic industries

2b Survive zc Survivors' share change

3a 1978 leadem All lndurtrkt

16 4 3b Survive 8

1 5 5 1 15 11 11 10 4

3c Survivors' sham change 1 2 1 0

+1% 7

+8% -2% 3 7 7

48 1978 folbwerr 19 -6% +2% -4% +1% +1%

1 4b Survive

2 5 8 5 1

3 14 13 10 7 0

4c Survivors' share change 2 2

+27 % 0 0 5 4 2 2

-2% 5a All firms 35 5b Survive

5 3 10 4 29 24 21 13

13 5 1

17

5c Survivors' share change 4

+6Oh 3

+8% 0 12 7 8

-2% -4% +3% -296 +2% +1% 9

'1978 MNEs muld not increase. while 1978 U.S.-only firms cwld nd decrease (see Table 3).

~ ~~

3 13

2 11

0 9

1 +4%

0 0 3 1 3 3 -6% +l % -6% +1% +1%

17 3 1 5 6 2 14 11 10 10 3

8 1 3 3 0

+8 % +e% 9

+1% 4% 6 6 6

+1% -2% +1% +1%

+5% -1 % +1% +1%

5 Z > r

INTERNATIONAL EXPANSION AND PERFORMANCE 6 6 1

TABLE 5 Incidence o? Survival and Types of Exits

Industry and Firm

Row Categories

Transition industries la All 1978 firms lb 1978 leaders IC 1978 followers

Domestic industries 2a All 1978 firms 2b 1978 leaders 2c lD78 followers

1978 Firms

(1) ~.

18 7

1 1

17 9 8

Surviving Firms, 1989 (2)

3 3 0

10 5 5

Exits 1979- 1989 (3)

15 4

1 1

7 4 3

Type of Exit

Dissolution (4)

4 0 4

1 1 0

Acquired by US.

Firm ( 5 )

6 2 A

6 3 3

Acquired

Foreign Firm (6)

by

5 2 3

0 0 0

Changing Presence in Transition and Donzestic Industries

Hypothesis 1, which predicted that international expansion will be beneficial in transition industries, is supported. The relevant information is contained in columns 2 and 8 of rows la, Ib, and IC of Table 4. Column 2 notes that two firms increased their international presence in the transition industries (row la), that both survived (row lb), and that they gained average market share of 4% (row IC). Column 8, by contrast, reports that there was only one survivor among thirteen firms that could have increased their international presence but did not expand, and that the survivor lost 6% market share. The difference in the survival incidence is highly significant by the Fisher exact and conditional probability tests, as we report in Table 6.13 Hypothesis 2, which predicted that expansion will be more common in transition than in domestic industries, is rejected. The relevant information is contained in column 5 and 6 of Table 3. Two of fifteen firms (13%) increased international presence in the transition industries and three of fourteen firms (21%) expanded in the domestic industries. By the Fisher exact and the conditional probability test, the difference is not statistically significant, as Table 6 reports. Upon reflection, the rejection of Hypothesis 2 is reasonable. Although international expansion may be more appealing in transition industries, actual implementation is not easy because of the higher level of competition in these industries. Also, some home firms in the transition industries might have expanded passively when they were acquired by foreign firms, as occurred in five cases (see Table 5 ) . Nonetheless, the result indicates clearly that industry transition is not associated with wholesale international expansion by most firms participating in the home market.


TABLE 6 Results of Survival Difference Tests

Probability 01 Observed Outcome if the Null Hypothesis

Is True' Support for

Fisher Exact Conditional Hypothesis in HvDothesis Statistic Probability First Column (1 1 International expansion is ,029 .OW

,. (2) (3) (4)

1.

2.

3.

4.

5.

6.

7.

8a

Bb.

9.

beneficial in transition industries.

Expansion is more common in transition than in domestic industries.

international expansion is beneficial In domestic industries.

Staying put is more viable in domestic than transition industries.

Retrenchment is negative.

Leaders are more likely to expand than followers.

Survival is more common in domestic than transition industries.

Leaders are more likely than followers to survive in transition industries.

Leaders and followers are equally likely to survlve in domestic industries.

Dissolution is more common in transition than In domestlc industries.

,322

,231

,023

,083

,161

,011

,043

,363

,160

,210

,162

,001

,079

,066

.0003

.002

,260

,056

Supported

Rejected

Rejected

Supported

Supported

Moderate support

Supported

Supported

Supported

Moderate support

~~

'The null hypothesis tested is the opposite of the hypothesis stated In the first column other than ab, where the null hypothesis is stated in the first column.

Hypothesis 3, which predicted that international expansion will be beneficial in domestic industries, is rejected statistically although the qualitative direction is consistent with the hypothesis. The relevant information is contained in columns 2 and 8 of rows 2a, 2b, and 2c of Table 4. Column 2 notes that all three firms that expanded in the domestic industries survived (row 2b) and gained average market share of 8% (row 2c). Column 8, by contrast, reports that six of eleven firms that stayed put in the domestic industries survived (row 2b) and that the firms lost an average of 2% market share (row 2c). The poorer performance of the firms that stayed put is qualitatively consistent with the prediction but the difference in the survival incidence is not


significant by the Fisher exact and conditional probability tests, as we report in Table 6. The contrast of the statistically weak results of Hypothesis 3 with the stronger results of Hypothesis 1 provides citcumstantial evidence that international expansion is more beneficial in transition industries than in domestic industries, as expected. Unexpectedly, though, the results of testing Hypothesis 2 indicate that firms are as likely to seek international opportunities in domestic industries as in transition cases. Such initial expansion in domestic cases may lay the groundwork for continued expansion should global advantages become more common in the industry. Indeed, as we report later in this section, only firms with some prior international experience survived in the transition industries. Hypothesis 4, which predicted that staying put would be more viable in domestic industries than in transition industries, is supported. Firms that neither decreased nor increased their international presence in transition industries suffered almost as much as those that decreased their international presence. Of twelve midrange and US.-only firms that did not increase their international presence (Table 4, row la of columns 4 and 5 ) , only one survived and that firm lost 6% market share (rows l b and lc).14 By contrast, firms that stayed put in domestic industries often survived. Of eleven midrange and U.S.-only firms in domestic industries that did not change their international presence (row 2a of columns 4 and S ) , six survived and, on average, lost only 1.5% market share (rows 2b and 2c). By the Fisher exact test and the conditional probability test, the difference in survival incidence in the two groups of industries is highly statistically significant, as Table 6 indicates. A strong implication of these results is that firms must expand with the industry in transition cases or face a high risk of exit, but that firms can maintain a primarily single-country focus in domestic industries.'' This result also has important implications for analysis of domestic niches within globalising industries. Although even a global industry may contain market segments in which domestically oriented firms can operate successfully (see, for instance, Morrison and Roth [1992]), the demands of such niches usually will change as the nature of the industry changes. We expect that structural inertia will inhibit the ability of many incumbents of a preglobal industry to adapt to the new demands of the domestic niches that open as an industry undergoes the transition to global status. Instead, we suspect that new domestic niches will tend to be filled by industry newcomers that are not bound by past industry-specific firm routines.'" Hypothesis 4 will be rejected when, contrary to our assumption, incumbents often create a domestically focused orientation suited to the new demands of a globalising industry. The results of this study are consistent with the argument that many incumbents of a preglobal industry cannot adapt to the changed industry demands. Hypothesis 5 , which predicted that decreased international presence would be associated with negative performance, is supported. The relevant information


is contained in columns 6 and 10 of rows la, lb, and IC and rows 2a, 2b, and 2c of Table 4. Column 6 notes that four firms decreased international presence in the transition and domestic industries (rows l a and 2a) and that none survived (rows l b and 2b). Column 11, by contrast, reports that nine of seventeen firms that could have decreased their international presence but did not, survived and gained average market share of 1% (rows l a to IC and 2a to 2c). The difference in the survival incidence is significant by the Fisher exact and conditional probability tests reported in Table 6. The distribution of the exits in the domestic and transition industry cases indicates that decreased international presence is associated with poor performance no matter what the international status of the industry." Hypothesis 6 , which predicted that leaders will be more likely to increase their international presence than followers, receives moderate support. The relevant information is contained in columns 2 and 7 of Table 4. Row 3a reports that four of fifteen leaders that could have expanded did so, while row 4a notes that only one of fourteen followers expanded. The conditional probability of the difference is statistically significant but the Fisher exact test does not reach conventional levels of significance, as we report in Table 6 . Hypothesis 7, which predicted that survival will be more common in domestic industries than in transition industries, is supported. In Table 5, rows la and 2a of columns 1 and 2 report that three of eighteen firms survived in the transition industries, while ten of seventeen firms survived in the domestic industries. Table 6 reports that the difference is statistically significant based on both the Fisher exact and the conditional probability tests. Hypotheses 8a and 8b, which predicted that leaders will be more likely than followers to survive in transition industries and that there will be no difference in domestic industries, are supported. In Table 5, rows Ib and IC of columns 1 and 2 report that three of seven leaders survived in the transition industries while none of the eleven followers survived. In the domestic industries, rows 2b and 2c of columns 1 and 2 report little difference in the proportions of leaders and followers that survived in the domestic industries: five of nine leaders and five of eight followers. The probabilities reported in Table 6 show that leaders' and followers' survival incidence differed significantly in transition industries but not in domestic industries. In our sample, only market leaders with midrange international presence were able to survive in the transition industries.'* It appears that competition is particularly grueling when industries undergo transition: only firms with a strong base. of industry-specific resources will be able to respond. Thus, the results suggest that moderate expansion while an industry remains primarily domestic may be needed to provide the base for successful extensive expansion when the industry begins to become more pervasively global. Yet, the test of Hypothesis 5 indicates that unsuccessful international expansion can be very costly, because retrenching firms do not survive. Firms that expand


before the advantages of international operation emerge may incur costly mistakes during the expansion because of lack of information and experience [Mitchell, Shaver and Yeung 19931. International expansion while an industry remains primarily domestic may be beneficial, therefore, but may also create severe problems for the expanding firm. The survival incidence results are consistent with the argument that increased foreign penetration drastically changes the terms of competition in an industry, weeding out many weaker competitors. Firms that adapt to the changed rules may fare very well, as firms that both expanded and survived in the transition industries gained market share. However, our work suggests that firms may need strong domestic bases and some prior international experience in order to adapt successfully." Hypothesis 9, which predicted that dissolution will be more common in transition than in domestic industries, receives moderate support. Column 3 of rows la and 2a in Table 5 reports that four of fifteen exits in the transition industries involved business shut down, while only one of seven domestic industry exits was a business dissolution. Table 6 reports that the conditional probability is statistically significant, but the Fisher exact test does not reach conventional levels of significance. Table 5 also reports additional information concerning business dissolution and acquisition. Business dissolution was more common for followers than for leaders in the transition industries (rows l b and IC in column 3). The likely reason for this outcome is that the leaders' assets were of value to an acquiring firm that was attempting to respond to the changing international status of the industry or was causing the change. Column 4 and 5, meanwhile, report that foreign firm acquisition of American businesses occurred in the transition industries but not in the domestic industry cases. The data also do not support the argument that followers may benefit if they expand internationally in order to minimise direct competition with industry leaders in the home market. Table 4 reports that only three of eleven industry followers that had at least midrange international presence in 1978 or expanded during the study period survived (rows 4a and 4b of columns 2, 3 ,4 , and 6) . This is about the same proportion of survivors as found among the followers (two of eight firms) that held US.-only status throughout the period (rows 4a and 4b of column 5 ) . In addition, followers that achieved some international presence were less likely to survive than leaders that had some international presence. Table 4 reports that seven of ten industry leaders that had at least midrange international presence in 1978 or expanded thereafter survived (rows 3a and 3b of columns 2 to 4), while only three of eight equivalent followers survived (rows 4a and 4b). Moreover, leaders' advantages in transition industries stand out in the discussion of Hypotheses 8a and 8b.


CONCLUSION

In striking contrast with previous studies that link international expansion with poor subsequent performance, we find that expansion is positive for firms in domestic and transition industries. Only when the international stage becomes saturated with global players, it appears, do the risks of expansion tend to dominate the benefits. The general message of our results is that industries undergoing global transition present both challenges and opportunities to established firms. Incumbents that adapt to the changing environment by increasing their global presence, particularly firms with some prior international experience and a strong base in the home market, will often survive and gain share. Firms that fail to react in the right direction, either because they do not recognise the changes that are taking place or lack the resources and experience to increase their international presence, will usually suffer. Many firms that do not expand in transition industries will be acquired or, in a nontrivial number of cases, dissolve their industry-related businesses. For domestic industries, meanwhile, increasing international presence is associated with longer survival and greater market share. Equally important, initial expansion in a domestic industry might provide a base for future expansion should the industry undergo global transition. Yet, unsuccessful attempts to expand internationally that lead to retrenchment can result in exit. Weaker firms, with less capability for expansion, can often survive as single-country players in domestic industries. We stress that the results of this study are exploratory. The study could usefully be extended by examining more firms in more industries, examining post-1978 entrants, and refining the measures of change in international presence. Nonetheless, we believe that the results are both valid and important. We emphasise the nonuniform consequences of international expansion and contraction. Expansion is necessary for survival in a transition industry. Late movers with no international experience will find it difficult to expand successfully once the transition is complete and the industry has become global in scope. Yet changes in industry international status often are highly uncertain; some industries may not become global. In these industries, firms that undertake substantial expansion in anticipation of advantages that do not materialise in a timely fashion, may find retrenchment both difficult and very costly. In light of this quandary, staged expansion, in which firms initially seek focused global opportunities before undertaking full-scale international presence, appears attractive. This issue provides a fruitful topic for further research.

NOTES 1. The authors operalionaliwd Porler's definition of a global induslry in lerms of a positive regression relationship between extensive international presence of a finn and its market share performance in a key market. This paper follows a similar procedure, as we describe below.


i

2. A key market is one in which II firm must compte if it is to fully r e a l k c any benefits of international operations [Mitchell, Shaver and Yeung 19921. 3. The ideal approach to studying performance of an expanding firm would be to document immediate and longer term performance in all markets in which the firm operates. The approach often is infeasible, however, because objective and comparable longitudinal performance data usually are not available. We do not include measures of profitability performance in the study because it is difficult to compare profitability at different times and in different contexts of a longitudinal study and because many burin- in the sample are privately held companies or divisions of large firms, which either do not report profits or do not separate division-level profits. 4. Established firms may be susceptible to challenges from new competitors if technology, regulations, and market demand change, but the disadvantages of international expansion often will outweigh the benefits in global industries. 5 . This prediction is consistent with the results shown by Mitchell and Singh [1992], who found that expanding firms tended to outprform those that did not expand following major industrial change. 6. The direction of causality of Hypothesis 5 cannot be determined unambiguously. Although retrenchment will sometimes cause problems encountered in the home market, some firms may opt to decrease their international presence after encountering problems at home. 7. By contrast, however, Mascarenhas [1986:21] argued that "the built-in advantages of the leaders and/or a relatively weak competitive position were found to be instrumental in motivating the international expansion of the non-dominant finns." 8. We also expect that leaders will usually benefit more than followers from international expansion, but we cannot test this prediction adequately with our sample because no followers expanded in the transition industries and t o o few firms expanded in the domatic industries. 9. The data for the regression estimates were obtained from the industry trade guides. The M N E variable in the estimates was equal to 1 if the guides accorded multinational status to a finn and equal to 0 if the firm had U.S.-only or midrange presence, which we discuss in the next section of Ihe paper and report in Table 2. 10. The trade guides used the following definitions when assigning classifications. Domestic-only status implies no substantial medical sector activity outside the home country by the firm, whether by export, import, or manufacturing. The exporter category applies to finns that export a non-trivial and verifiable portion of the medical g o d s that they manufacture in the home country. The overseas manufacturer category applres to finns that own and operate medlcal sector manufacturrng facrlrties outside their home country. The guides assign tnultinational status to firms that the editors judged to possess "a combination of domestic and foreign manufacturing, as well as importing and exporting," such that the firms have achieved "truly international scope and influence" in their medical sector activities [Hale and Hale 1989:III,I]. We did not use the guides' "importer" category in this study, b e c a w we have no strong rationale to classify importing as either increased or decreased international presence. The guides sometimes did not assign exporter, overseas manufacturer, or multinational status, but also did not identify a finn as a domestic-only participant. Because all such firms were small, we treated them as domestic-only cases. 11. Our data include the entire 1978 populations of the five industries. Owing to the small sizes of the populations, contrngency techniques are better suited than multivariate regression-type analysis. 12. T h e Fisher exact test is calculated as (E!P!G!H!) / (S!A!B!C!D!) , where A - D are observation values in the cells of a 2 x 2 matrix, E and Fare column stuns (A+C-E; B+D-F). G and Hare the row sums (A+B-G; C+D-H), and S is the grand sum. Thc conditional probability is calculated as (EcA) [(B/F)A(D/F)C], where (EcA) is the number of combinations in selecting A observations out of a total of E observations. 13. A more conservative comparison of firms that increased to those that stayed put, whereby the number of firms that decreased is subtracted from those that did not increase (column 8 minus column 6, which leaves eleven firms and one survivor), also produces a significant comparison, 14. I t is interesting to note that the surviving stay-put firm expanded after the study period and subsequently gained 1 I W market share. 15. We would like to examine the joint implications of staying put for leaders and followers in domestic and transition industries, but lack data for careful analysis. However, our data do suggest that remaining US.-only in domestic industries was more viable for market followers than for market leaders. 16. Hannan and Freeman [I9891 discuss structural inertia and finn routines in detail.

Ma JOURNAL OF INTERNATIONAL BUSINESS STUDIES. FOURTH QUARTER 1993

17. We found an association between industry exit and international retrenchment in both the domestic and transition CBFS, but do not report separate results owing to limited data (only four firms retrenched. two each in the domestic and transition cases). We also found that the firms were more likely to stay put in transition industries and that firms were more likely to decrease their international presence in domestic industries, but the differences were not statistically significant. 18. All l hne survivors in the transition industries (Table 4, row Ib of column I ) were industry leaders with midrange international presence in 1978. 19. This m u l l can also be interpreted in a complementary vein. In the tradition of Knickerbocker [1973]. Oraham [1978. 19901 argued that firms will tend to crass-invade each other's markcts LIS a form of oligopoliplic competition. Our result suggests that clorF-invasion may be necessary for survival in transition industries. However, the evidence is circumstantial because we cannot determine whether the American firms expanded in the home markets of the foreign entrants or whether the expansion took place in other markets.

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