The rise of micro-multinational enterprises The days of large multinationals as the only companies able to invest abroad are over. Recent years have seen the rise of micro-multinationals, a new type of small and medium-size enterprises (SMEs) that are well equipped to exploit opportunities abroad. What sets these companies apart? Compared to pure exporting SMEs, micro-multinationals are more entrepreneurial, more internationalized and more actively use their organizational networks to obtain in-depth foreign market knowledge. These firms provide superior customer service and collect exceptional feedback on local market conditions that allow them to adapt and innovate. The journal International Business Review recently published a study conducted by ESADE PhD student Joon-ho Shin, under the supervision of Prof. Xavier Mendoza, analyzing more than 1,000 highly internationalized Spanish SMEs in the service sector operating over an 8-year period. Its goal was to find out whether establishing a direct presence in foreign markets improves firm performance. "Due to the 2007 financial crisis, internationalization became an attractive option for growing revenues for firms of all sizes in Spain," says Prof. Mendoza. "We chose to focus our study on SMEs because over 60% of Spanish parent companies with subsidiaries abroad are SMEs and service internationalization is less understood and more challenging compared to manufacturing internationalization." Firm performance The study investigates the relationship between multinationality (measured by an index based on the number of foreign subsidiaries and countries where these are located) and firm performance (measured by ROA) and whether this relationship varies between capital-intensive and knowledge-intensive service firms. The degree of capital intensity varies significantly across service firms. Thus, the higher the capital intensity the higher the financial burden for engaging in international expansion. Likewise, the degree of knowledge intensity also varies significantly across service firms. Knowledge-intensive services embed a higher degree of intangible or tacit knowledge and require a higher level of client interaction and local adaptation, which implies higher heterogeneity in the services provided and higher costs in transferring critical organizational knowledge and capabilities to foreign markets. The study confirms that these differences have important implications for firm performance. "Our research reveals that firms providing knowledge-intensive services are more likely to increase their performance in their initial stages of international expansion compared to companies providing capital-intensive services, although the picture is the opposite in more advanced stages." Knowledge-intensive services Why do knowledge-intensive service firms perform better in the early stages of international expansion? The authors of the study point to lower financial burden, because the value of these firms' services relies on intangible assets that are largely embedded in their human resources, and the fact that most of them pursue a client-following strategy. "Knowledge-intensive service firms face less severe costs of internationalization at the outset, which allows them to reap the benefits of internationalization faster," according to Prof. Mendoza. This improvement in performance, however, is temporary. Knowledge-intensive services are more affected by cultural and institutional differences and are more difficult to scale. The study shows that as the level of multinationality increases, managing and controlling increasingly diverse international activities becomes more complex and may create severe pressures on a firm's key resources (people) and managerial capacity. "Our findings suggest that knowledge-intensive service firms encounter a threshold of internationalization at relatively low levels of multinationality -- in the study, this point is reached when a company is present in more than three countries or has more than four foreign subsidiaries -- and that expanding beyond that point can be highly detrimental to the firm's performance." Moreover, client-following firms may be prone to over-internationalize because their managers tend to underestimate the long-term costs of establishing foreign operations. While these firms enjoy an obvious advantage in the early phase of market entry, they might face more difficulties than expected at a later stage, seeking new local clients once the initial projects that brought them to a country have been completed. Capital-intensive firms Although capital-intensive service firms experience negative performance effects at the beginning of their international expansion, their performance increases as they further internationalize. "The high initial costs associated with the liabilities of internationalization and insufficient access to economies of scale appear to be the most important hurdles these firms face when first entering foreign markets," says Prof. Mendoza. Most of the capital-intensive firms in the study appear to follow a strategy of market concentration as a means of overcoming these hurdles. Expanding in few foreign markets allows these firms to reach the minimum local operations scale needed to be competitive. In this way, they can deploy their limited resources more efficiently and foster the accumulation of knowledge and learning about these markets, reducing the costs associated with the liabilities of internationalization. Further, a strategy of market concentration reduces the organizational complexity of coordinating and controlling international operations. All these aspects help explain why these firms perform better at medium and high levels of multinationality without facing a threshold of internationalization. "The high initial costs of internationalization faced by capital-intensive service firms should not discourage managers, as the net performance impact will be positive in the long run," concludes Prof. Mendoza.This article was originally published in the first issue of Knowledge Pills, a magazine by ESADE Executive Education featuring research-backed tips and advice for executives.

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Does investing abroad improve firm performance?

10/2017

The rise of micro-multinational enterprises


The days of large multinationals as the only companies able to invest abroad are over. Recent years have seen the rise of micro-multinationals, a new type of small and medium-size enterprises (SMEs) that are well equipped to exploit opportunities abroad.


What sets these companies apart? Compared to pure exporting SMEs, micro-multinationals are more entrepreneurial, more internationalized and more actively use their organizational networks to obtain in-depth foreign market knowledge. These firms provide superior customer service and collect exceptional feedback on local market conditions that allow them to adapt and innovate.


The journal International Business Review recently published a study conducted by ESADE PhD student Joon-ho Shin, under the supervision of Prof. Xavier Mendoza, analyzing more than 1,000 highly internationalized Spanish SMEs in the service sector operating over an 8-year period. Its goal was to find out whether establishing a direct presence in foreign markets improves firm performance.


"Due to the 2007 financial crisis, internationalization became an attractive option for growing revenues for firms of all sizes in Spain," says Prof. Mendoza. "We chose to focus our study on SMEs because over 60% of Spanish parent companies with subsidiaries abroad are SMEs and service internationalization is less understood and more challenging compared to manufacturing internationalization."


Firm performance


The study investigates the relationship between multinationality (measured by an index based on the number of foreign subsidiaries and countries where these are located) and firm performance (measured by ROA) and whether this relationship varies between capital-intensive and knowledge-intensive service firms.




The degree of capital intensity varies significantly across service firms. Thus, the higher the capital intensity the higher the financial burden for engaging in international expansion. Likewise, the degree of knowledge intensity also varies significantly across service firms. Knowledge-intensive services embed a higher degree of intangible or tacit knowledge and require a higher level of client interaction and local adaptation, which implies higher heterogeneity in the services provided and higher costs in transferring critical organizational knowledge and capabilities to foreign markets.


The study confirms that these differences have important implications for firm performance. "Our research reveals that firms providing knowledge-intensive services are more likely to increase their performance in their initial stages of international expansion compared to companies providing capital-intensive services, although the picture is the opposite in more advanced stages."


Knowledge-intensive services


Why do knowledge-intensive service firms perform better in the early stages of international expansion? The authors of the study point to lower financial burden, because the value of these firms' services relies on intangible assets that are largely embedded in their human resources, and the fact that most of them pursue a client-following strategy. "Knowledge-intensive service firms face less severe costs of internationalization at the outset, which allows them to reap the benefits of internationalization faster," according to Prof. Mendoza.


This improvement in performance, however, is temporary. Knowledge-intensive services are more affected by cultural and institutional differences and are more difficult to scale. The study shows that as the level of multinationality increases, managing and controlling increasingly diverse international activities becomes more complex and may create severe pressures on a firm's key resources (people) and managerial capacity.


"Our findings suggest that knowledge-intensive service firms encounter a threshold of internationalization at relatively low levels of multinationality -- in the study, this point is reached when a company is present in more than three countries or has more than four foreign subsidiaries -- and that expanding beyond that point can be highly detrimental to the firm's performance."


Moreover, client-following firms may be prone to over-internationalize because their managers tend to underestimate the long-term costs of establishing foreign operations. While these firms enjoy an obvious advantage in the early phase of market entry, they might face more difficulties than expected at a later stage, seeking new local clients once the initial projects that brought them to a country have been completed.



Capital-intensive firms


Although capital-intensive service firms experience negative performance effects at the beginning of their international expansion, their performance increases as they further internationalize.


"The high initial costs associated with the liabilities of internationalization and insufficient access to economies of scale appear to be the most important hurdles these firms face when first entering foreign markets," says Prof. Mendoza.


Most of the capital-intensive firms in the study appear to follow a strategy of market concentration as a means of overcoming these hurdles. Expanding in few foreign markets allows these firms to reach the minimum local operations scale needed to be competitive. In this way, they can deploy their limited resources more efficiently and foster the accumulation of knowledge and learning about these markets, reducing the costs associated with the liabilities of internationalization. Further, a strategy of market concentration reduces the organizational complexity of coordinating and controlling international operations. All these aspects help explain why these firms perform better at medium and high levels of multinationality without facing a threshold of internationalization.


"The high initial costs of internationalization faced by capital-intensive service firms should not discourage managers, as the net performance impact will be positive in the long run," concludes Prof. Mendoza.



This article was originally published in the first issue of Knowledge Pills, a magazine by ESADE Executive Education featuring research-backed tips and advice for executives.

The relationship between multinationality and performance: Knowledge-intensive vs. capital-intensive service micro-multinational enterprises
Shin, Joonho; Mendoza Mayordomo, Xavier; Hawkins, Matthew Allen; Choi , Changbum
International Business Review
Vol. 26, nº 5, 10/2017, p. 867 - 880
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