In the following, the risk implication of the export activity which in detail means how the ex- port activity affects the risk, will be analyzed. The relationship between the export activity and risk appeared as an important theme in the current internationalization literature. First, the term of risk especially in the internationalization literature has to be clarified. Referring to this, risk is named as a central concept in the internationalization literature and research (Liesch et al., 2011). Firms are placing greater importance on risk management. The devel- opment and utilization of risk management techniques have contributed to operational and strategic risk reduction. Researchers use therefore different definitions for risk in various dis- ciplines (Althaus, 2005). A general definition is made by Al-Bahar and Crandall (1990). Ac- cording to them, risk can be seen as “the exposure to the chance of occurrences of events ad- versely or favorably affecting project objectives as a consequence of uncertainty”. In the in- ternationalization literature, risk is identified as the instabilities and vulnerabilities of firms that engaged in internationalization and which impose limitations, restrictions and/or losses (Hsieh et al., 2010). Hence, it is a consequence of uncertainty. Events are defined as certain if the probability of their occurrence is 100% and completely uncertain if the probability of oc- currence is 0%. In between these extreme probabilities, the uncertainty varies widely (Jaafari, 2001).
Accordingly, risk can be a possible source of loss for the firm that might arise from the pur- suit of unsuccessful decisions. Furthermore, it can also be a possible source of profit that might arise from the pursuit of successful decisions. Risk focuses consequently on the out- comes of decisions in a positive way as opportunity and in a negative way as downside losses (Roberts et al., 2012). Risk as downside loss focuses on the likelihood and magnitude of po- tential losses. In contrast to this, risk as opportunity focuses on firm’s upside potential (Alva- rez and Barney, 2005).
Therefore, strategic risk is identified in the literature as an event that is able to have signifi- cant performance implications on firms (Elango, 2010). In detail, strategic risk is related to the risk at corporate level and it affects the development and the implementation of firm’s strategic decisions. Consequently, strategic risk focuses on the outcomes of strategic deci- sions. Strategic risk might arise e.g. from an incorrect strategic plan, from making poor busi- ness decisions, from the incorrect assessment of future market trends, or from inadequate re-
45 source allocation. Furthermore, strategic risk is generally more difficult to manage than opera- tional or project risk and it includes risk that is related to firm’s long-term performance which includes different variables like the market, corporate governance and stakeholders (Roberts et al., 2012).
Risk management is detected in the literature as a strategy in order to handle and limit the potential downside losses that are accompanied by unsuccessful decisions. In this regard Schmit and Roth (1990) defined risk management as the performance of activities designed to minimize the negative impact of uncertainty regarding possible losses. In addition, firm’s risk management is the art and science of planning, assessing, and handling future events, in order to guarantee a favorable outcome and the act or practice of dealing with risk (Silvers, 2005). It can be claimed that the goal of risk management is to measure the potential risks in order to monitor, control and decrease them. Referring to this, firm internationalization or rather the export decision is considered as one available strategic option, in order to reduce the strategic risk. The impact of the internationalization process on risk presents a complex relationship which has been approached from a number of different perspectives and researchers. Never- theless, similarly to the internationalization-performance relationship presented in the previ- ous chapter, the existing empirical evidence regarding the relation between internationaliza- tion and risk is not completely consistent among the researchers (Elango, 2010).
A first analysis of exporting activities expected impact on risk was proposed by Hirsch and Lev (1971). They adapted the model of Markowitz-Tobin portfolio selection to the selection of exporting markets. They found that an adequate internationalization strategy is able to con- tribute to a revenue stabilization by reducing firm’s vulnerability to a domestic demand shock. Based on this, Rugman (1976) builds a conceptual framework in order to conclude that MNEs have reduced risk in comparison with non-internationalized firms. Nonetheless, Reeb et al. (1998) demonstrate that MNEs have, contradicting to the expectations, a higher level of sys- tematic risk. In the same theoretical framework, Choi (1989) developed a model for MNEs, with the result that an internationalization strategy reduces firm’s risk.
Thus, some researchers e.g. Kim et al. (1993), Allan and Pantzalis (1996) and Elango (2010) claim that internationalization is associated with the capacity of risk reduction and higher profits, especially by responding beneficially to changes in firm’s environment. Other re- searchers in turn like Burgman (1996), Reeb et al. (1998) as well as Reuer and Leiblein
46 (2000) argue that firm’s risk increases with the degree of internationalization. In this regard, Reeb et al. (1998) argue that the additional risks which are accompanied by internationaliza- tion are higher than the internationalization benefits because internationalization leads to an increase in firm’s level of systematic risk. An alternative upstream-downstream hypothesis is proposed by Kwok and Reeb (2000) in the internationalization-risk research. They suggest that the overall effect of internationalization on risk is expected to vary with different local and foreign market conditions.
In consequence, internationalized firms do not necessarily obtain benefits through lower lev- els of downside risk. The results are mixed in this stream of literature and not consistent among the different researchers, reaching from positive to negative risk outcomes generated through internationalization or rather the export activity. As shown, different authors such as Rugman (1976), Allen and Pantzalis (1996) as well as Lee et al. (2006) observed that interna- tional investments in form of exportation generate more value than geographic concentration. Other researchers like Reuer and Leiblein (2000) obtained contradictory results regarding the risk reduction capacity associated with the increase of international investments. Neverthe- less, as already shown in previous sections, firms can profit through their internationalization strategy in form of better performance. This can be used as a first indicator to make the con- clusion that the generation of better performance subsequently reduces the risk as well. When using performance in order to avoid the risk definition, it refers to the quasi-experiment meth- odology. Different authors have already used this methodology and it is further explained in section 3.1 (Chung and Beamish, 2005; Lee and Makhija, 2009; Song et al., 2015).
However, beyond the indirect effect through performance on risk, there is also evidence that the export decision has a direct positive impact on risk. The exporting activity can be used as a risk diversification method through the spread of sales over different markets with different business cycle conditions or in a different phase of the product cycle. Consequently, the ex- port activity is able to provide an opportunity in order to substitute sales at home by sales abroad when the home market is impacted by a negative demand shock. Otherwise, the de- mand shock would force a firm to close down (Wagner, 2012).
Thus, the exporting activity is considered in the literature as one available strategic option to reduce the strategic risk. Different empirical results indicate that an adequate internationaliza- tion strategy in form of exports is able to reduce the strategic risk (Miller and Reuer, 1998;
47 Wagner, 2012). The risk can be reduced by increasing the internationalization in terms of a higher scope of operation across different countries and reducing the dependence on a single country (Elango, 2010). An overview of empirical evidence and the results regarding interna- tionalization and risk is given in table 5. The mentioned capacity of risk reduction through export activity is named in the present work as the export effect. The findings from this sec- tion suggests that exports can have a positive effect on strategic risk which means a signifi- cant reduction of firm’s strategic risk. This is mainly due to the internationalization benefits that outweigh the costs (See table 2 and table 3). Consequently, the first hypothesis proposes that the internationalization in form of the export activity reduces firm’s strategic risk.
Thus, the first hypothesis is: