Firm internationalization approaches and performance: the moderating role of the home country's formal institutions

Abstract

PurposeThis study investigates how the degree of internationalization (DOI) affects the financial performance of emerging market companies by making the distinction between export intensity and multinationality (i.e. foreign direct investment). The authors argue that the different DOI-performance patterns in the literature relate to different internationalization approaches, which are moderated in distinct ways by formal institutions in the home country.Design/methodology/approachBased on data of Brazilian firms in several industries and with different internationalization patterns including 100 exporting firms and 30 multinational companies with varying degrees of multinationality over a period of five consecutive years, the authors test their hypotheses using an unbalanced panel data with 346 firm-year observations. In order to test how the quality of formal institutions moderate the DOI-performance relationships, the authors estimate the changes in the slope of the regression line by adding and subtracting one standard deviation to the Worldwide Governance Indicators (WGI) variables.FindingsA positive and linear association between export intensity-performance (EI-P) highlights the location specific comparative advantages of exporting Brazilian firms, while the multinationality-performance (M-P) relationship points to a horizontal S-shape pattern which conforms to the theoretical assumptions of the three-stage internationalization process. Formal institutions moderate positively the EI-P relationship, but moderate negatively each of the three stages of the M-P relationship.Research limitations/implicationsThe findings from this study provide critical insights that contribute to the ongoing debate on how formal institutions in the home country affect the DOI-performance relationship of emerging market companies (EMCs). However, the authors consider that it has limitations as they focused exclusively on formal institutions captured by governance institutions in the Brazilian context.Practical implicationsThis study provides relevant insights to managers and policy makers. Findings reveal that strong formal institutions in the home country make it easier (cheaper) for EMCs to invest abroad, and, at the same time, increase the efficiency of exporting firms and positively influence financial performance. Moreover, results show that during downturns in their domestic markets, multinational EMCs outperform domestic firms. In that sense, while policy makers can promote the internationalization and competitiveness of EMCs by implementing more supportive formal institutions, managers should consider a proactive approach and invest abroad when conditions in the home country are favorable.Originality/valueBy making the distinction between export intensity and multinationality this study contributes to the literature on the DOI-performance of EMCs providing a more nuanced view on how formal institutions in the home country moderate the EI-P and M-P relationships in different ways.

International performance of Latin American companies: institutional and reputational perspectives

“…Concerning the Latin American context, our study's findings corroborate previous research conducted in this geographical area. Specifically, we observed a positive influence of formal and regulatory institutions on the EI of companies, aligning with the conclusions of Abreo et al (2021) in Colombia and Correa et al (2023) in Brazil. Moreover, our investigation revealed a noteworthy connection between the international experience of the CEO and the company's performance.…”

“…Specifically, we observed a positive influence of formal and regulatory institutions on the EI of companies, aligning with the conclusions of Abreo et al . (2021) in Colombia and Correa et al . (2023) in Brazil.…”

Guest editorial: Multilatinas in the era of uncertainties: a trajectory of different dependencies

“…Globalization has been a vital driver of the changes in the economic structure of emerging economies, from a closed system to a more outward-oriented and internationally interdependent system (Narula, 2014). In addition, such a process has established a new context of competition in emerging economies and has provided conditions for the internationalization of firms and the rise of new multinationals that present different characteristics and firm-specific advantages that underpin their international competitiveness and strategies for entering foreign markets (Correa da Cunha et al , 2023). As a result, the deepening of global interdependency contributed to the significant growth of these new MNCs instead of limiting or constraining their multinationality.…”

“…This suggests that their international performance is bound to the extent that national policies effectively provide resources and protection to sustain their performance. Multilatinas is a specific case of internationalization, where firms depend highly on the conditions by which local advantages (primarily related to market imperfections) support international performance (Correa da Cunha et al , 2023).…”

Exploring the link between home country attributes and firms' internationalisation: evidence from GEDI and WEF data

“…Hence, the relationship between home country institutional factors and firm internationalisation is increasingly a topic of interest in the international business and strategic management literature (Estrin et al , 2012; Hernández et al , 2022a; Stoian and Mohr, 2016). Results from previous studies indicate that home country institutional factors may impact on a firm's decision to pursue international activities, including the method and scope of the international activities (Correa et al , 2022; Gaur et al , 2014; Tsukanova, 2019; Yang et al , 2022). Home country institutional factors such as the quality of governance, the legal and regulatory environment, the level of economic development and the cultural norms and values of the home country create enabling or limiting conditions for firms seeking to go international (Chen et al , 2019; Deng and Zhang, 2018; Estrin et al , 2016; Hernández et al , 2022).…”