The question if internationalization leads to reduced risk of SMEs is the focus of this study. When analyzing the internationalization-risk relationship, the internationalization- performance relationship has to be included as well. Risk can be measured by means of a qua- si-experiment in form of an internationalization-performance relationship during a crisis peri- od (Song et al., 2015). This issue will be further explained in section 4.1. Consequently, it seems necessary to analyze the mentioned relationship.
The internationalization-performance relationship has been one of the central issues in inter- national business literature. Given the high number of different conceptual and empirical studies which were conducted in terms of diversification and its impact on firm performance, different questions must be asked. In this regard, it has to be questioned which theoretical approaches already exist with respect to this subject, in which scope these approaches have been surveyed and analyzed, what kind of conclusions have been carved with respect to the relationship and effect of internationalization on firm performance and which particularities have to be considered within an empirical study of the internationalization-performance rela- tionship.
Thus, given literature has already researched whether internationalization influences firm per- formance and if it creates or destroys value. Referring to the mentioned question, there are no clear results. Annavarjula and Beldona (2000) argue that prior literature is hampered by two interrelated issues: problematic measures for key variables and inconsistent results. Referring to the variables, the literature is hampered by issues with regard to the measures for the key dependent variables like performance and firm value, but also by issues with regard to the measure for the independent variables like degree of internationalization. In literature occurs a lack of uniformity across different studies and a constriction of measures used in individual studies (Morgan and Katsikeas, 1997; Douglas and Lorraine, 2004).
It can be concluded that there are no clear outcomes about the internationalization- performance relationship (Pangarkar, 2008). As a result, numerous researchers have argued and empirically observed that higher levels of internationalization lead to higher firm perfor- mance (e.g. Errunza and Senbet, 1981; Grant, 1987; Kim and Lyn, 1986; Kim et al., 1993; Pangarkar, 2008; Qian, 1996; 1997; 2002). In addition, other authors could not find any effect
35 (e.g. Buckley et al, 1977; Morck and Yeung, 1991). Then again, others found a negative ef- fect (e.g. Collins, 1990; Michel and Shaked, 1986; Shaked, 1986) or a curvilinear relationship (e.g. Ruigrok and Wagner, 2003; Capar and Kotabe, 2003). In the following the different evi- dence is presented.
Linear positive effect
Pangarkar (2008) analyzes, based on analyses of 94 survey responses provided by SMEs in Singapore, the relationship between the degree of internationalization and performance. Drawing from the internationalization process and location theories, he proposes a new meas- ure for the degree of internationalization which takes beside the export intensity, the disper- sion of sales across geographic regions into account. In addition, he deploys a perceptual, multi-item measure of performance. The results support the central arguments that higher de- gree of geographic diversification leads to better performance. He also found support for the perception that firms investing in more attractive environments generate better performance (Pangarkar, 2008). Other authors and researchers like Errunza and Senbet (1981), Grant (1987), Kim et al. (1993) and Delios and Beamish (1999) also found evidence for a positive relationship between the degree of internationalization and performance. They mainly ex- plained the positive effect with the internalization theory. The mentioned theory explains that firms increase performance by optimally internalize international transactions. They conse- quently spread risks, achieve economies of scale and scope, sell to new customers, and reap additional returns from investments in marketing and innovation (Thomas, 2006).
36 Figure 1: Linear and positive relationship
Source: Own elaboration
Linear negative effect
To profit from internationalization and obtain the previously mentioned benefits is not auto- matic and guaranteed. Different evidence from several authors exist, that the degree of inter- nationalization has a negative effect on firm performance. Johanson and Vahlne (1977) claim that particularly firms being in an early stage of internationalization face a disadvantage rela- tive to domestic ones because of their lack of experience of the target market as well as of the needed knowledge (Johanson and Vahlne, 1977). Further authors like Fatemi (1984) and Michel and Shaked (1986) confirm the existence of a negative relationship.
Perf o rm an ce Degree of Internationalization
37 Figure 2: Linear and negative relationship
Source: Own elaboration
No effect
Beyond the positive and the negative effect, other researchers do not find any effect. Thus, Morck and Yeung (1991) or Gomez-Mejia and Palich (1997) do not detect any significant effects of degree of internationalization on performance in its researches. One reason for this outcome could be that the positive effects on internationalization neutralize the negative ef- fects.
Up to this point it was presented that the literature shows contradicted and ambiguous results by analyzing the internationalization-performance relationship. In addition to the previously described linear positive, linear negative and no effect, other empirical studies concluded cur- vilinear relationships, but also with inconsistencies. For instance, different researchers con- cluded in their studies a U-shaped relationship between the internationalization and the firm performance. This means, the performance is first declining and then rising with the higher degree of internationalization (e.g. Lu and Beamish, 2001; Ruigrok and Wagner, 2003). Other authors in turn found evidence for an S-shaped relationship or rather an inverted S-shaped relationship (Lu and Beamish, 2004; Contractor et al., 2003). Recent investigations propose also an M-curve and an inverse M-curve (Almodovar, 2012).
Perf o rm an ce Degree of Internationalization
38
U-shaped relationship
Different researcher found a U-shaped curvilinear relationship when internationalizing. Among them are Hitt et al. (1997), Capar and Kotabe (2003), Lu and Beamish (2001) as well as Ruigrok and Wagner (2003), Thomas (2006). Ruigrok and Wagner (2003) explain the U- shaped relationship as a result of the fact that the firm organization can learn the accomplish- ment of the increased degree of complexity with the progress of the internationalization pro- cess. Thus, a firm experiences a negative performance when starting to expand internationally due to the liability of foreignness. Through gaining experience over time and organizational learning, firms are able to gain positive benefits from their internationalization (Thomas, 2006). However, the U-shaped relationship could also be explained from a static perspective. Thus, the marginal complexity costs of the internationalization are relatively the highest. This means that the complexity costs rise sharply if a firm starts to diversify geographically. But, after an initial successful internationalization, the costs rise only slightly when conducting a global internationalization. If at the same time the internationalization revenues are linear, there occur a U-shaped relationship between the degree of internationalization and perfor- mance (Jansen, 2006).
Figure 3: U-shaped relationship
Source: Own elaboration
Perf o rm an ce Degree of Internationalization
39
Inverse U-shaped relationship
Thomas and Eden (2004) are in agreement with other empirical researchers who found a cur- vilinear relationship between the degree of internationalization and firm performance which particularly is an inverted U-shaped relationship, first rising and then declining. Among these researchers are Daniels and Bracker (1989), Gomes and Ramaswamy (1999) as well as Hitt et al. (1997).
The inverted U-shaped relationship implies that the degree of internationalization carries both, benefits and costs. Thomas and Eden (2004) argue that the U-shaped relationship occurs be- cause the benefits decrease while the costs increase as the degree of internationalization in- creases. The relationship between degree of internationalization and firm performance should be non-linear, first rising and then decreasing. While the degree of internationalization rises, the costs and risks of multiple authorities, values and cultures should rise too. The relationship between degree of internationalization and performance depends on a firm’s ability to manage the complexities inherent in the internationalization process (Thomas and Eden, 2004).
Figure 4: Inverse U-shaped relationship
Source: Own elaboration
Perf o rm an ce Degree of Internationalization
40
S-shaped relationship
Lu and Beamish (2004) synthesized the results of a range of empirical studies and supposed a multi-stage sigmoid relationship or rather S-shaped relationship. In their empirical study, they found evidence for the hypothesized effect on firm performance. The S-shaped relationship indicates that firms experience first negative returns when starting internationalization be- cause of the liability of foreignness. In the further development of the internationalization process they gain knowledge and experience which in turn leads to positive returns, up to an optimal point. Nonetheless, negative returns can occur as the organizational costs outweigh the benefits of international diversification in the further internationalization process. Other empirical researchers agree with Lu and Beamish (2004) and found also an S curve. Among them are Contractor et al. (2003) or Tsai (2013).
Figure 5: S-shaped relationship
Source: Own elaboration
In addition to the S-curve, further authors found an inverted S-shaped relationship. Among these are Thomas and Eden (2004), Contractor et al. (2003) and Ruigrok et al. (2007). They argue firms experience positive returns initially by internationalizing. Then, over time interna- tionalization leads to complex managerial problems and negative performance. Finally, over
Perf o rm an ce Degree of Internationalization
41 the long-run very high levels of internationalization can be managed which results in positive performance.
Figure 6: Inverted s-shaped relationship
Source: Own elaboration
M-shaped relationship/ Inverted M-shaped relationship
Apart from the previous outcomes there is also evidence for an M-shaped relationship. Al- modovar (2012) was one of the first researchers who found empirical support for an M curve relationship between the degree of internationalization and performance. He found empirical- ly that exporting firms with a standardizing orientation perform differently from customizing firms as the degree of internationalization increases. There are complex interactions between financial performance and the degree of internationalization in which standardizing firms demonstrate an M-shaped relationship, whereas customizing firms demonstrate an inverted M curve relationship (Almodovar, 2012). In addition, Lee (2010) also found evidence for an M- curve relationship. In detail, it is a fourth-degree polynomial fit between degree of interna- tionalization and firm performance (Lee, 2010).
Perf o rm an ce Degree of Internationalization
42 Figure 7: M-shaped relationship
Source: Own elaboration
By observing the results of the internationalization-performance relationship obtained in pre- vious research, it is obvious that there is a broad consensus that the results have, reaching from a linear positive and negative relationship till non-linear relationships. The non-linear relationships can have a U-shaped, S-shaped or an M-shaped curve, who also can be inverse.