Firm internationalization and performance:
case of companies listed at the Warsaw Stock Exchange
1
Mariusz-Jan Radło , Dorota Ciesielska
Abstract:
In this study we test two hypotheses. The first of these is that there is a linear relationship between
the level of internationalization of companies and their profitability. While the second hypothesis is
that the relationship is U-shaped. The results of our econometric modelling of the impact of
internationalization of Polish companies listed on the Warsaw Stock Exchange on their performance measured by return on assets and return on equity - confirmed the hypothesis of a U-shaped
relationship between these phenomena. This means that the internationalization in the initial phase
may lead to a fall in their profitability, but with increasing internationalization we can expect an
increase of profitability ratios. This observation is consistent with the results of other studies on the
issue in question and raises important implications for both short and long-term decisions taken by
the company and stock investors.
Jel code:
Keywords: internationalization, international diversification, performance
1
Corresponding author: Mariusz-Jan Radło, World Economy Research Institute, Warsaw School of Economics,
al. Niepodległości 162, 02-554 Warsaw, Poland, email: [email protected]
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1. Introduction
One of the most important issues for companies opting for internationalization is to assess the
impact of going abroad on the economic performance of the company. As indicated by Hennart
(2007) the multinationality-performance relationship has been investigated by many researchers and
described in over 100 empirical studies. Their theoretical approaches varied, including such
perspectives like: portfolio diversification, resource based view, organizational learning theory, etc.
Three key arguments in the literature explaining expected growth of profitability of companies as a
result of internationalization include: exploitation of scale economies, better and more flexible
access to resources, and learning. Nonetheless, findings of various empirical studies do not confirm
that there is general positive dependence between internationalization and performance of
companies. Some authors indicate a positive effect, other negative. There are also studies suggesting
that there are no relationship between multinationality and performance or the relationship varies
depending on the stage of internationalization, and is U-shaped or sigmoid (S-shaped).
In addition, most studies describing the mentioned phenomenon relates to companies from
developed markets and still there are very few studies based on data for emerging market
multinationals. The development of emerging market multinationals is relatively new phenomenon,
and some authors suggest that traditional theories - based on experience of multinationals from
developed economies - cannot explain internationalization of companies from emerging markets.
Thus the relationship between multinationality and performance in their case can also be different
than that in case of multinationals from developed economies.
In the above perspective, the aim of this paper is to assess the impact of the internationalization of
Polish enterprises. This paper adds value to the existing research in a two areas. Firstly, it tests the
hypothesis of a linear and U-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 - that are still in relatively early stage of
internationalization, and may reflect experiences of emerging market multinationals - thus our
findings may also explain nature of internationalization of companies from emerging markets.
2. Empirical findings: stylized facts
As shown in Table 1 there are various studies testing the impact of internationalization on
companies. Studies enumerated there can be divided into a few groups depending on relationship
between multinationality and performance.
The first group of studies are these indicating that there is no mentioned relationship or the
relationship is very weak. In example Tallman et al. (1996) in their study based on data for 192 large
manufacturing corporations from the United States show that there is no relationship between the
level of internationalization and profitability of enterprises, or the 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 the lack of 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 partly be due to the size of the Indian market, which is relatively absorbent.
These authors suggest, however, that the results of their research, allow to formulate thesis that the
higher the level of internationalization may increase the possibility of obtaining the benefits of
internationalization.
Other studies have shown, however, that there is a significant positive linear relationship between
internationalization and profitability. This was confirmed in example by Ramsey et al. (2012), who
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pointed out that the relationship between internationalization and profitability is positive and linear.
This is due to the fact that with increasing involvement in activities abroad, companies should
acquire knowledge about running operations in international markets which should lead to better
financial results. Gaining experience about the specificity of foreign markets will then lead to
increasing the presence of companies on foreign markets, what - in turn - increase focus of managers
on internationalization of companies.
However, most studies presented in the mentioned table - support both positive and negative impact
on the profitability of internationalization that varies with the degree of internationalization
Table 1 The results of selected studies showing the impact of internationalization on the performance and
value of companies
Author,
Data
publication date
Tallman, LI, 1996 192 large companies from the US,
data for 1988
Riahi-Belkaoui,
100 US companies - manufacturing
1998
and service industries
Results
The level of internationalization has a positive but weak effect on
the financial results of companies.
Studies have confirmed S-shaped relationship between the level of
internationalization and those in
Ruigrok, Wagner, 84 large German companies, panel The test result indicates that the relationship between
2003
data for the period 1993-1997
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
Capar, Kotabe, 81 German companies in the The study indicated a U-shaped relationship between
2003
service industries
Bolaji,
Chris, 22 Nigerian banks, panel data for The study showed a significant U-shaped impact of
2014
the period 2008-2010
internationalization on the financial results of banks
Chen, Hsu, 2010 224 Taiwanese companies, panel
data 2000-2005
Contractor et al., 291 Indian companies, panel data
2008
1997-2001
Hsu,
Pereira, 110 US multinationals
2008
The impact of internationalization on the profitability of the Sshaped
The impact of internationalization on the profitability of the Ushaped
Acquisition 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, panel The results of the study show that the impact of internationalization
2012
data 2008-2009
on profitability is positive.
Singla, George, 237 listed Indian companies The study showed no positive impact on the financial results of the
2013
engaged in export activity, panel internationalization of Indian companies.
data 2002-2008
Źródło: Opracowanie własne.
The U-shaped relationship between internationalization and profitability was confirmed by the
Ruigrok and Wagner (2003). They indicated, however, that the exact shapes of “U-curve” may vary.
This may be due to differences in international expansion opportunities arising between countries.
They also show the importance of learning and acquiring knowledge of a foreign operation that
occurs in the process of internationalization and its impact on the profitability of the company.
Similar results were also obtained Contractor et al. (2007), who analyzed the impact on the
profitability of the internationalization of 291 Indian companies in 1997-2001. Also Hsu and Pereira
(2008) 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 - explain 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.
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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 indicated the presence of a strong positive relationship between internationalization and
profitability of the analyzed entities. This relationship, however, was not linear character. 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 an 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.
Interestingly, some authors, indicate that the relationship between internationalization and
performance is sinusoid (or S-shaped). Such relationship between internationalization and
profitability was confirmed by survey results of Riahi-Belkaoui (1999) for the 100 US corporations in
manufacturing and service industries. 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, nonetheless after exceeding a certain level of internationalization it
is positive, but then after exceeding higher levels of internationalization the relationship turns to be
negative again.
3. Hypothesis, data, and model
In this study we set the two hypotheses. The first of these is that there is a linear relationship
between the level of internationalization of the Polish companies and their profitability. While the
second hypothesis is that the relationship is U-shaped.
To investigate these hypotheses we proposed - following Capar and Kotabe (2003) - two regression
models describing linear and curvilinear impact of internationalization on profitability. These models
took shape:
1. 𝑅 = 𝛽0 + 𝛽1 𝐴𝑠𝑠𝑒𝑡𝑠 + 𝛽2 𝐹_𝑟𝑒𝑣 + 𝑒
2. 𝑅 = 𝛽0 + 𝛽1 𝐴𝑠𝑠𝑒𝑡𝑠 + 𝛽2 𝐹_𝑟𝑒𝑣 + 𝛽3 𝑠𝑞_𝐹_𝑟𝑒𝑣 + 𝑒
where: 𝑅 - profitability, 𝐴𝑠𝑠𝑒𝑡𝑠 - value of total assets, 𝐹_𝑟𝑒𝑣 the share of foreign revenues in total
revenues, 𝑠𝑞_𝐹_𝑟𝑒𝑣 - square of 𝐹_𝑟𝑒𝑣.
The first formula represents linear model - describing linear relationship between the level of
internationalization and profitability. While the second formula tests curvilinearity - i.e. U-shaped
relationship between the level of internationalization and profitability. In this formula we added
variable 𝑠𝑞_𝐹_𝑟𝑒𝑣. We assume, that if R-squared for the second model will be higher than the Rsquared for the first model, and the second model will indicate higher and statistically significant
impact of variable 𝑠𝑞_𝐹_𝑟𝑒𝑣 on the depending variable (ROA or ROE) then U-shaped relationship
between internationalization and profitability will be confirmed. In both models we use 𝐴𝑠𝑠𝑒𝑡𝑠 as a
control variable. The models were estimated using OLS regression (see: Capar i Kotabe, 2003).
The model was tested using cross-sectional data for 75 companies listed on the Warsaw Stock
Exchange. We took data only for those companies that in 2013 possessed foreign subsidiaries. The
study used data on internationalization and the company's financial results for 2013. The surveyed
companies represent a variety of service industries and manufacturing.
The variables used in the study, their definitions and characteristics are described in Table 2 and
Table 3. In the study we use two alternative dependent variables describing profitability, i.e.: return
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on assets (ROE), and return on equity (ROE). Average value of ROA for companies in our sample
stood at around 5% and ROE at about 6.3%. Values of ROE values ranged from -13.8% to 75%. In
turn, the ROE from -72% to 90.6%.
Table 2 Variables used in the model
Variable
Assets
ROA
ROE
F_rev
sq_F_rev
Definition
Total assets (in Polish zloty)
Return on assets - ratio of net profit to the value of total assets
Return on equity - ratio of net profit to equity value
The share of foreign revenues in total revenues
Square of share of foreign revenues in total revenues
Table 2 Data characteristics
Variable
Average value
Median value
Minimum value
Maximum value
ROA
0,0499285
0,0354580
-0,138256
0,751239
ROE
0,0627054
0,0674600
-0,721012
0,905611
Assets
2,52267e+006
514109,
12912,0
5,16440e+007
F_rev
0,421253
0,409000
0,00800000
1,00000
sq_F_rev
0,245328
0,167281
6,40000e-005
1,00000
4. Results and discussion
In Table 4 we present the results of estimation of the first (linear model) - with ROA as dependent
variable. The regression coefficient describing the impact of internationalization on return on assets
is positive and statistically significant (p-value = 0.00472). The impact of the control variable proved
to be statistically insignificant.
Table 4 OLS estimation of model 1 with ROA as dependent variable
Model 1, number of observations: 75
Dependent variable (Y): ROE
coefficient
const
−0,00129378
Assets
−1,40705e-09
F_rev
0,130021
Mean dependent var
Sum squared resid
R-squared
F(3, 71)
Log likehood
Schwarz criterion
0,049929
0,721116
0,109705
4,436053
67,74622
−122,5400
std. error
0,0220638
1,56287e-09
0,0445872
t-ratio
-0,0586
-0,9003
2,9161
p-value
0,95340
0,37096
0,00472
S.D. dependent var
S.E. of regression
Adjusted R-squared
P-value (F)
Akaike
Hannan-Quinn
***
0,104621
0,100077
0,084975
0,015248
−129,4924
−126,7164
In Table 5 we present results of model estimation of the second (curvilinear) model with ROA as a
dependent variable. 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 (p = 0.02735). While the regression coefficient of square variable describing the level of
internationalization has been positive and higher than in the linear model at p = 0.00182. Moreover
R-squared value in this model was higher than in the first model and amounted to 0.22 (in
comparison to 0.11 in the first model). Summing up, the above results seems to confirm the
existence of U-shaped relationship between profitability (measured by ROA) and internationalization
(measured by share of foreign revenues in total revenues of the analyzed companies).
Table 5 OLS estimation of model 2 with ROA as dependent variable
Model 2, number of observations: 75
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Dependent variable (Y): ROA
coefficient
0,0689346
−8,70913e-010
−0,340729
0,51655
const
Assets
F_rev
sq_F_rev
Mean dependent var
Sum squared resid
R-squared
F(3, 71)
Log likehood
Schwarz criterion
0,049929
0,628251
0,224358
6,845675
72,91600
−128,5620
std. error
0,0300006
1,4783e-09
0,151235
0,159449
t-ratio
2,2978
-0,5891
-2,2530
3,2396
p-value
0,02452
0,55764
0,02735
0,00182
S.D. dependent var
S.E. of regression
Adjusted R-squared
P-value (F)
Akaike
Hannan-Quinn
**
**
***
0,104621
0,094067
0,191584
0,000407
−137,8320
−134,1306
Źródło: Opracowanie własne.
We have also testes both models using ROE as a dependent variable. In the table 6 we present the
results of the of the first (linear model) with ROE as dependent variable. The regression coefficient
describing the impact of internationalization on return on assets is positive and statistically
significant (p-value = 0.02459). The impact of the control variable proved to be statistically
insignificant.
Table 6 OLS estimation of model 1 with ROE as dependent variable
Model 1, number of observations: 75
Dependent variable (Y): ROE
coefficient
const
−0,0134299
Assets
−2,08831e-09
F_rev
0,193241
Mean dependent var
Sum squared resid
R-squared
F(3, 71)
Log likehood
Schwarz criterion
0,062705
2,569304
0,070960
2,749686
20,09910
−27,24574
std. error
0,0416471
2,95004e-09
0,0841619
t-ratio
-0,3225
-0,7079
2,2961
p-value
0,74803
0,48130
0,02459
S.D. dependent var
S.E. of regression
Adjusted R-squared
P-value (F)
Akaike
Hannan-Quinn
**
0,193319
0,188904
0,045154
0,070670
−34,19820
−31,42216
In Table 7 we present results of the estimation of model two (curvilinear) with ROE as a dependent
variable. The regression coefficient describing the impact of the control variable is statistically
insignificant. The regression coefficient describing the impact of the level of internationalization is
negative, but statistically insignificant. The regression coefficient of the variable describing the
square of the level of internationalization is statistically significant (p = 0.05643) and positive.
Moreover in the second model the R-squared value, which amounts to 0.12, and is higher than in the
first model (0.08). Summing up, the above tests also confirm the existence of U-shaped relationship
between profitability (this time measured by ROE) and internationalization (measured by share of
foreign revenues in total revenues of the analyzed companies).
Table 7 OLS estimation of model 2 with ROA as dependent variable
Model 2, number of observations: 75
Dependent variable (Y): ROE
const
Assets
F_rev
sq_F_rev
coefficient
0,0694248
−1,45578e-09
−0,362145
0,60942
std. error
0,0591238
2,91336e-09
0,298046
0,314235
t-ratio
1,1742
-0,4997
-1,2151
1,9394
p-value
0,24423
0,61884
0,22837
0,05643
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*
Mean dependent var
Sum squared resid
R-squared
F(3, 71)
Log likehood
Schwarz criterion
0,062705
2,440044
0,117699
3,157148
22,03481
−26,79966
S.D. dependent var
S.E. of regression
Adjusted R-squared
P-value (F)
Akaike
Hannan-Quinn
0,193319
0,185383
0,080419
0,029931
−36,06961
−32,36822
5. Summary
Summing up the results of our analysis we can indicate that results of our econometric modelling of
the impact of internationalization of Polish companies (listed on the Warsaw Stock Exchange) on
their performance - measured by return on assets and return on equity - confirmed the hypothesis of
a U-shaped relationship between these phenomena. This means that the internationalization in the
initial phase may lead to a fall in their profitability, but with increasing internationalization we can
expect an increase of profitability ratios. This observation is consistent with the results of other
studies on the issue in question and raises important implications for both short and long-term
decisions taken by the company and stock investors.
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