Is Internationalization a Boon or a Bane? An Assessment of the I-P Relationship.

Abstract

The debate on whether and how internationalization affects firm performance, despite decades of research remains ambiguous. While some internationalization-performance (I-P) relationship studies have also found the absence of a significant relationship or that firms are better off operating in their domestic markets, the focus of these studies is largely limited to developed markets. In contrast, we conduct our analysis in an important emerging market using an extensive data set of 173,665 observations from 27,388 Indian manufacturing and services firms during the period 1996-2018. We find that depending on the mode of internationalization chosen and the industry context, the internationalization effect on firm performance results in a relationship that is either an ‘S’/cubic model or a ‘U’/quadratic model. For the entire sample of firms, as well as for a sample exclusively of manufacturing firms, the relationship is an ‘S’ when firms internationalize through exports and is a ‘U’ when the mode is foreign investments. For manufacturing firms, we find that the performance during internationalization exceeds prior performance when the mode is exports. For the services industry, the relationship is a ‘U’ for both exports and foreign investments, implying that services firms are yet to achieve their optimal level of internationalization. We check for the robustness of our results by conducting state of the art statistical tests recommended in the literature for both the cubic model and the quadratic model.