Guest blogger: Dr Raquel García-García is lecturer in strategic management at The Open University Business School (OUBS). Dr Raquel García-García is leading the Business Network Breakfast Briefing on 12 September 2017. For more information, visit the OUBS website.
To speed or not to speed is the looming question in today’s time-competitive international markets
After studying the outcomes of foreign expansion for several years now, the speed at which companies internationalise their operations and the returns they obtain from doing so is one of the topics that interests me most. Time is key in the current business world, but can multinationals keep up the pace?
Multinationals have traditionally expanded abroad slowly and gradually, moving from neighbouring countries to more distant ones. IThis internationalisation model prevailed in the international economic landscape during much of the 20th century. However, in recent years some multinationals have managed to defy this traditional pattern by successfully expanding abroad at a dizzying speed.
Professors Mauro Guillén and Esteban García-Canal provide various examples of this latter type of company in their book Emerging Markets Rule. Specifically, they discuss the cases of BYD (China), América Móvil (Mexico), and Ocimum Biosolutions (India). Wang Chuanfu founded rechargeable battery manufacturer BYD in 1995. By 2008 the company was already the largest manufacturer of nickel-cadmium batteries, selling more than 500 million batteries a year around the world. Tapping into its technological expertise, the Chinese multinational also made a triumphant incursion into manufacturing electric vehicles. Another example of a company that has taken the international markets by storm is América Móvil. Established in 2000, telecommunications giant América Móvil turned owner Carlos Slim into one of the wealthiest people alive (according to Forbes magazine). The company has operations in 25 countries and is considered to be the leading provider of wireless services in Latin America. Around the same time Indian entrepreneur Anu Acharya set up Ocimum Biosolutions, which expanded relentlessly to become one of the indisputable leaders of the bio-IT industry. As of 2017 the multinational has ventured into the US, Europe, and the Asia Pacific region.
However, multinational companies coming from emerging markets such as China, Mexico or India are not the only ones that can reap the benefits of a rapid foreign expansion. In a recent study co-authored by myself and professors Esteban García-Canal and Mauro Guillén (Journal of World Business, 2017) we found that firms from the ‘old’ Europe can also keep up with new trends in internationalisation and profit from speeding their internationalisation process, thus providing some hope to the managers of established multinationals from developed economies whose global leadership has been challenged by newcomers to the international scene.
Relying on a sample of Spanish listed firms, our results show that the speed of internationalisation has a different effect on performance depending on the timespan considered. Whereas it fails to have a significant effect in the short term – that is, on accounting measures – it displays an inverted U-shaped pattern in the long term – namely, in the capital markets. This implies that managers should pay attention to both short- and long-term measures of performance to have more accurate estimations of the effect of a rapid internationalisation.
The U-shaped pattern found between speed of internationalisation and long-term performance highlights that some multinationals can actually benefit from a high speed of internationalisation. Nonetheless, it also warns managers that they need to be aware that there is limit to the positive relationship between the multinationals’ speed of internationalisation and their long-term performance. In other words, managers cannot speed up the foreign expansion of their firms ad infinitum without eventually experiencing a decline in their value in capital markets.
Additionally, the results of this study account for knowledge-based factors that can support or hinder a successful rapid foreign expansion, which managers should take into consideration when making decisions about the speed of internationalisation at their firms. Whereas technological knowledge might be helpful at first to boost the benefits of a rapid internationalisation, it may become detrimental beyond a certain speed. This is ultimately explained by the need of multinationals to adapt their technology to the characteristics of the host countries where they operate. Technology adaptation to foreign markets is hard and time-consuming. Attempting to do so in a short period of time is likely to lead to higher costs and failures.
The diversity of a multinational’s international experience also plays a pivotal role in the relationship between speed of internationalisation and long-term performance. In this regard, even though the prior exposure to diverse institutional contexts may limit the learning opportunities when speeding up the internationalisation, it also helps managers decide more rapidly the multinationals’ course of action, which eventually allows them to outweigh the setbacks of a rapid international expansion.
Time is precious, and even more so in the international business scene. Speeding up the internationalisation process can be a good idea for some companies. However, managers must be cautious before expanding abroad in a rapid fashion and assess whether they have the necessary tools to succeed in doing so beforehand.
This article was originally published by HR Magazine. Read the original article.