Internationalization and Firm

Zdoświadczeń zagranicznych

■

Internationalization and Firm

Performance of Companies Listed at the Warsaw Stock Exchange__________________________ Mariusz-Jan Radło* Dorota Ciesielska-Maciągowska**

Introduction The development of emerging multinationals from post-transition economies is quite new, but already described phenomenon in the economic literature. Most of the existing papers on that topic analyze models and theories explaining the mentioned phenomenon (see e.g. Jaklic and Svetlicic, 2001; Andreff, 2002; Kalotay, 2004; Radlo and Sass, 2012; Zemplinerova, 2012; Sass et al., 2012; Radlo, 2012; Ferencikova and Ferencikova, 2012) or motives of internationalization in case of outward FDI (see e.g. Jindra et al., 2015; Kowalewski and Radlo, 2014). There are however still very few papers describing the impact of internationalization of companies from transition countries on their performance. Two and a half decades after the launch of economic transformation and almost one and a half decade of the development of outward FDI from post-transition economies it is now possible to assess how internationalization has influenced the performance of companies from these countries. There is a common belief that internationalization should help to improve performance of companies. There are three key arguments supporting this idea. They are: economies of scale, better and more flexible access to resources, and learning effects (Hennart, 2007). Despite the fact that the impact of the internationalization on the performance is relatively well described in economic literature findings of various empirical studies do not confirm positive dependence which was mentioned above. Some authors indicate a positive effect, the others neutral or negative. There are also studies suggesting that there is no relationship between the multinationality and the performance or that the relationship varies depending on the stage of internationalization, and is U-shaped or sigmoid (S-shaped). Moreover, most of research concerning the mentioned relationship is based on experience of companies from developed economies followed by these based on emerging markets multinationals. There are only few papers analyzing the mentioned phenomenon in post-transition economies (see: Damijan et al., 2007 or Vaatanen et al., 2009).

* Mariusz-Jan Radło, PhD, DsC, Corresponding Author, World Economy Research Institute, Warsaw School of Economics ** Dorota Ciesielska - Maciągowska, PhD, Institute of Markets and Competition, Warsaw School of Economics.

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EKONOMIKA I ORGANIZACJA PRZEDSIĘBIORSTWA

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Internationalization and Firm Performance of Companies Listed at the Warsaw Stock Exchange In the above perspective, the goal of this paper is to assess the impact of the internationalization on the performance of companies in Poland. This paper adds value to the existing research in three areas. Firstly, it tests the hypotheses of a linear, U-shaped and S-shaped impact of internationalization on profitability of companies and shed additional light on this relationship. Secondly, it tests the mentioned relationship using data for companies - listed at the Warsaw Stock Exchange which are still in relatively early stage of internationalization. Thirdly, the paper also contributes to the discussion about the role of corporate structures in economic development of post-transition economies.

1.

Literature review and hypotheses

As shown in Table 1 there are various studies testing the impact of internationalization on companies. Enumerated studies can be divided into a few groups depending on the relationship between the multinationality and the performance. The first group of studies consists of these indicating no relationship between multinationality and performance. Tallman et al. (1996) in their study based on data for 192 large manufacturing corporations from the United States showed that there is no relationship between the level of internationalization and profitability of enterprises, or that this relationship is very weak. The level of internationalization was measured by the income from sales abroad in total revenues and the number of countries in which various companies located their foreign direct investments. Similarly, Singla and George (2013) pointed out that there is no impact of multinationality on the profitability of companies. They study was based on data for 237 exporting Indian companies listed on the stock exchange. Among these companies 101 were also foreign direct investors. The mentioned authors have indicated that that a lack of clear relationship between the performance companies and the internationalization may be caused partly by the size of the Indian market, which is relatively absorbent. However these authors have suggested, that the result of their research, allows to formulate the conclusion that high level of internationalization may increase the possibility of obtaining benefits from internationalization. Other studies have shown a linear and significantly positive relationship between internationalization and profitability. According to Ramsey et al. (2012) with increasing involvement in activities abroad, companies should acquire knowledge about running operations in international markets what should result in better financial results. Gaining experience about the specific market features will then lead to increasing presence of companies on foreign markets, what - in turn - increase focus of managers on internationalization of companies. Similarly, Vaatanen et al. (2009) using data for 695 Russian companies representing various sectors have found out a positive and linear relationship between internationalization and performance. Delios and Beamish (1999) have indicated that both product and geographical diversification positively influence performance of Japanese companies. Positive impact of internationalization on performance, was also confirmed by Goerzen and Beamish (2003), however they indicated that the diversity of host countries' environments can negatively affect the performance.

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Zdoświadczeń zagranicznych ■ Table 1. The results of selected studies showing the impact of internationalization on the performance and value of companies Author, Data publication datę Tallman, Li, 1996 192 large companies from the US, data for 1988 Riahi-Belkaoui, 100 US companies manufacturing and service 1998 industries Gomes, 570 US companies in 4 Ramaswamy, 1999 manufacturing industries Delios, Beamish, 399 Japanese companies 1999 Ruigrok, Wagner, 84 large German companies, panel 2003 data for the period 1993-1997

Capar, Kotabe, 81 German companies 2003 service industries Goerzen, Beamish, 290 Japanese companies 2003

in the

Lu, Beamish, 2004 1489 Japanese firms Yu-Ching et 2006 Elango, 2006

al., 1419 Taiwanese SMEs (818 electronics and 601 textile) 719 companies from 12 emerging markets

Results The level of internationalization has a positive but weak effect on the financial results of companies. There is S-shaped relationship between the level of internationalization. Multinationality and performance has U-shaped relationship. Both product and geographical diversification positively influence performance of companies. The relationship between internationalization and performance of a company is U-shaped. Moreover, the study emphasized the importance of learning and knowledge and their positive impact on results in international activities. There is an U-shaped relationship between internationalization and the performance. Internationalization has a positive impact on performance, however the diversity of host countries’ environments can negatively affect the performance. There is S-shaped relationship between multinationality and performance There is U shaped relationship between multinationality of small and medium sized companies and their performance There is U shaped relationship between degree of internationalization and performance in manufacturing companies and positive linear relationship in service companies There is positive and linear relationship between internationalization and performance The impact of internationalization on the profitability of the S-shaped

Vaatanen et al., 695 Russian companies 2009 representing various sectors Chen, Hsu, 2010 224 Taiwanese companies, panel data 2000-2005 Contractor et al., 291 Indian companies, panel data The impact of internationalization on the profitability of the U-shaped 2008 1997-2001 Hsu, Pereira, 2008 110 US multinationals Acąuisition of market experience and social precedes internationalization and learning processes determine the impact on the profitability of the internationalization (U-shaped) Ramsey et al., 41 large Brazilian companies, The impact of internationalization on profitability is positive. 2012 panel data 2008-2009 Singla, George, 237 listed Indian companies There is no positive impact of the internationalization of Indian 2013 engaged in export activity, panel companies on their financial results. data 2002-2008 Bolaji, Chris, 2014 22 Nigerian banks, panel data for The study showed a significant U-shaped impact of the period 2008-2010 internationalization on the financial results of banks.

Similarly, Elango (2006) - who have analyzed data for 719 companies in 12 emerging markets - indicates that the relation between multinationality and performance is positive and linear in service companies. However his studies have also shown that in case of manufacturing firms the relationship was U-shaped. The U-shaped relationship between internationalization and profitability was also confirmed by the Ruigrok and Wagner (2003) and Yu-Ching et al. (2006) for small and medium sized companies from Taiwan. Yu-Ching et al. (2006) have however indicated that the exact shapes of “U-curve” may vary. This may be due to differences in international expansion opportunities arising between countries. They have also shown the importance of learning and acquiring knowledge


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Internationalization and Firm Performance of Companies Listed at the Warsaw Stock Exchange from a foreign operation that occurs in the process of internationalization and its positive impact on the profitability of the company. Also Hsu and Pereira (2008) have supported the hypothesis of U-shaped multinationality-performance relationship - based on analysis of data for 110 US multinationals. They pointed out that the acquisition of market and social experience related to internationalization - i.e. learning processes - explains the analyzed relationship. The U-shaped relationship between internationalization and profitability was also confirmed by Capar and Kotabe (2012) who analyzed data for 81 German companies in the service industries. Similar results were also presented by Bolaji and Chris (2014). They analyzed the performance of 22 Nigerian banks and relations between their profitability of internationalization in 2008-2012. Their study have indicated the presence of a strong positive relationship between internationalization and profitability of the analyzed entities. This relationship, however, was not linear. In the initial period there was a decrease in the internationalization of the profitability of banks. This was explained by the Uppsala model according to which at the initial stages of internationalization companies face a number of difficulties arising from insufficient knowledge of a foreign operation and cultural differences. As a result, at the early stage of internationalization companies are not able to reap the financial benefits related to internationalization. Nonetheless, with the passage of time and after gaining experience the corporate strategy will be adjusted to the specificity of international markets, the costs of operations on foreign markets will diminish, and profitability of internationalized companies will increase. U-shaped relationship between multinationality and performance was also confirmed by Gomes and Ramaswamy (1999) in their research based on data for US companies. Interestingly, some authors, indicate that the relationship between internationalization and performance is sigmoid (or S-shaped). Such relationship between internationalization and profitability was confirmed by survey results of Riahi-Belkaoui (1998) for the 100 US corporations in manufacturing and service industries or Lu and Beamish (2004) for 1489 Japanese companies. Similar results were also presented by Chen and Hsu (2008). Their analysis was based on data for 224 Taiwanese companies in the years 2000-2005. They indicated that the impact on the profitability of internationalization at the beginning of internationalization is negative. After exceeding a certain level of internationalization it changes to positive, and then turns to be negative again. Taking the literature review and goals of this paper into account, in this study we set three competing hypotheses following the above key finding of the research on multinationality and performance of companies: ■ Hypothesis one: there

is a positive

linear relationship between the

degree

of internationalization of companies and their economic performance. ■ Hypothesis two: there is a curvilinear (U-shaped) relationship between the degree of internationalization of companies and their economic performance. ■ Hypothesis three:

there is a sigmoid (S-shaped) relationship between the degree

of internationalization of companies and their economic performance.

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Zdoświadczeń zagranicznych 2.

Methodology: model and data

Three regression models - describing linear, curvilinear and sigmoid impact of internationalization on profitability - were proposed to investigate hypotheses proposed above. Following Lu and Beamish (2004) these models include linear term of multinationality in model 1, its squared term in model 2, and its cubic term in model 3. As a result these three models took following shapes:

where: R - profitability, Assets - value of total assets, Frev the share of foreign revenues in total revenues, sąFrev - square of Frev , and cu Frev - cube of Fre v . ROA - return on assets - as a dependent variable was used in all models. This choice is consistent with the practice of similar studies carried out by other researchers - see Riahi-Belkaoui (1998), Gomes and Ramaswamy (1999), Lu and Beamish (2004) or Contractor et al. (2008). Among independent variables - as a as a measure of internationalization - share of foreign revenues in total revenues was taken. This measure was often used in similar studies as a proxy for the internationalization of companies - see Riahi-Belkaoui (1998), Gomes and Ramaswamy (1999), Contactor et al. (2008) or Elango (2006). It reflects dependence of a company on foreign markets for sales revenues. Moreover, in all models we have used total revenues as a control variable (see: Gomes and Ramaswamy, 1999). The first formula which was presented above relates to the hypothesis 1 and represents linear model. It describes the linear relationship between the level of internationalization and profitability. The second formula - related to hypothesis 2 - includes squared measure of internationalization (variable sqFrev) and tests curvilinearity - i.e. U-shaped relationship between the level of internationalization and the performance. In the third model - related to hypothesis 3 - we added cubic value of internationalization measure ( cu Frev) - to test whether the impact of internationalization on the performance is S-shaped. We assume, that if R-squared for one of the above models is higher than the R-squared for other models, and the model indicates higher and statistically significant impact of the internationalization term (linear, squared or cubic -

respectively) then the particular relationship between

internationalization and profitability will be confirmed. We did not test the delayed impact of independent variables on the dependent variable, because the measure of internationalization that we use describe results of internationalization (i.e.: foreign revenues) and its impact on performance is not expected to be delayed. The models were estimated using OLS regression. To estimate the models we used cross-sectional data for 74 companies listed on the Warsaw Stock Exchange for the year 2013. Only the data for companies that in 2013 possessed foreign subsidiaries were taken into account. The surveyed companies represent a variety of service industries and


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Internationalization and Firm Performance of Companies Listed at the Warsaw Stock Exchange ■ Table 2. Variables used in the model Variable

Definition

Source

Revenues

Total revenues (in Polish zloty)

Company data

ROA

Return on assets - ratio of net profit to the value of total assets

Company data

F_rev

The share of foreign revenues in total revenues

Company data

sq_F_re\

Sąuare of share of foreign revenues in total revenues

Company data

Cu F Rev

Cube of share of foreign revenues in total revenues

Company data

■ Table 3. Data characteristics Variable

Average value

Median value

Minimum value

Maximum value

Revenues

3,39609e+006

488396,

18941,0

l,13853e+008

ROA

0,0503545

0,0366823

-0,138256

0,751239

F_rev

0,424567

0,415000

0,00800000

1,00000

Sq_F_rev

0,248225

0,172261

6,40000e-005

1,00000

Cu_F_Rev

0,167153

0,0715182

5,12000e-007

1,00000

manufacturing. The variables used in the study, their definitions and characteristics are described in Table 2 and Table 3. In the study performance of companies was measured by the return on assets. Average value of ROA for companies in our sample stood at around 5%. Values of ROA values ranged from -13.8% to 75%.

3.

Results and discussion

In Table 4 the results of estimation of the first (linear model) are presented. The regression coefficient describing the impact of internationalization on return on assets is positive (0.127515) and statistically significant (p-value = 0.00610). The impact of the control variable proved to be statistically insignificant. ■ Table 4. Estimation of the linear model Model 1: OLS, using observations 1-74, Dependent variable: ROA Coefficient

Std. Error

t-ratio

p-value

const

-0.0018235

0.022524

-0.0810

0.93570

Revenues

-5.77334e-010

8.6003e-010

-0.6713

0.50421

F_rev

0.127515

0.0451104

2.8267

0.00610

Mean dependent var

0.050355

***

S.D. dependent var

0.105270

Sum sąuared resid

0.724635

S.E. of regression

0.101025

R-squared

0.104248

Adjusted R-squared

0.079016

F(2, 71)

4.131507

P-value(F)

0.020075

Log-likelihood

66.16620

Akaike criterion

-126.3324

Schwarz criterion

-119.4202

Hannan-Quinn

-123.5750

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Zdoświadczeń zagranicznych ■ Table 5. Estimation of the curvilinear model Model 2: OLS, using observations 1-74, Dependent variable: ROA Coefficient

Std. Error

t-ratio

p-value

const

0.0690978

0.0305184

2.2641

0.02667

Revenues

-1.80027e-010

8.17497e-010i

-0.2202

0.82634

F_rev

-0.347792

0.153325

-2.2683

0.02640

**

Sq_F_rev

0.521823

0.161769

3.2257

0.00191

***

**

Mean dependent var

0.050355

S.D. dependent var

Sum sąuared resid

0.630859

S.E. of regression

0.094933

R-squared

0.220169

Adjusted R-squared

0.186747

F(3, 70)

6.587662

P-value(F)

0.000550

71.29388

Akaike criterion

-134.5878

Hannan-Quinn

-130.9113

Log-likelihood Schwarz criterion

-125.3715

0.105270

In Table 5 results of model estimation of the second (curvilinear) model are presented. The regression coefficient describing the impact of control variable is statistically insignificant. In contrast, both variables describing internationalization proved to be statistically significant. The regression coefficient describing the impact of internationalization turned out to be negative: -0.347792 (p = 0.02640). While the regression coefficient of square variable describing the level of internationalization has been positive (0.521823) and higher than in the linear model at p = 0.00191. Moreover R-squared value in this model was higher than in the first model and amounted to 0.22 (in comparison to 0.10 in the first model). Summing up, the above results seems to confirm that the curvilinear model better describes the relationship between performance (measured by ROA) and internationalization (measured by share of foreign revenues in total revenues of the analyzed companies) than the linear one. In Table 6 results of model estimation of the third (sigmoid) model are presented. The regression coefficient describing the impact of control variable is statistically insignificant. All three terms describing internationalization proved to be statistically significant. The regression coefficient describing the impact of internationalization turned out to be positive: 1.19047 (p = 0.0.00015). The regression coefficient of square variable describing the level of internationalization has been negative (-3.53746) at p < 0.0001. While the regression coefficient of cubic variable describing the level of internationalization has been positive (2.8362) and higher than in other models at p < 0.00001. Moreover R-squared value in this model was higher than in the first model and the second model and amounted to 0.47 (in comparison to 0.10 in the first model, and 0.22 in the second model). Summing up, the above results seems to confirm that sigmoid model better describes the relationship between performance (measured by ROA) and internationalization (measured by share of foreign revenues in total revenues of the analyzed companies) than the curvilinear and sigmoid models.

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Internationalization and Firm Performance of Companies Listed at the Warsaw Stock Exchange ■ Table 6. Estimation of the sigmoid model Model 3: OLS, using observations 1-74, Dependent variable: ROA Coefficient

Std. Error

t-ratio

p-value

const

-0.0504022

0.0328071

-1.5363

0.12903

Revenues

-1.98012e-010

6.77986e-010i

-0.2921

0.77112

F_rev

1.19047

0.297266

4.0047

0.00015

Sq_F_rev

-3.53746

0.721638

-4.9020