A Multinational Enterprise (MNE) is an organization that owns or controls production, services, or other assets in one or more countries outside its home country. Typically, multinational enterprises maintain a centralized headquarters responsible for global strategy while operating offices, factories, or subsidiaries across several nations.
Some multinational enterprises—also referred to as international, transnational, or stateless firms—possess budgets that exceed the GDP of smaller countries, highlighting their growing influence in the global economy.
International Growth of Multinational Enterprises
The international expansion of firms has been widely studied in academic research due to the assumption that entering international markets leads to utility maximization and improved business performance.
Over the last four decades, researchers have focused extensively on the relationship between a firm’s Degree of Internationalization (DOI) and its performance. The dominant belief suggests that higher international involvement positively influences firm outcomes.
Meaning of Degree of Internationalization (DOI)
One of the earliest definitions of internationalization was given by Ansoff (1957), who described it as the expansion of business activities beyond national borders.
Broadly, the degree of internationalization refers to:
- The extent to which a firm’s sales and operations occur outside its home country
- The number of foreign markets served
- The number of foreign subsidiaries owned
It can also be examined through two geographic dimensions:
- Regional diversification
- Country-level diversification
According to Thomas and Eden (2004), degree of internationalization reflects the extent to which organizations increase their international sales and operations.
Importance of Degree of Internationalization
The degree of internationalization is a key indicator of global involvement. Many studies suggest that operating in a larger number of countries increases opportunities to:
- Leverage economies of scale
- Exploit cost differences across countries
- Access new markets and resources
However, literature also highlights that internationalization introduces complexities and coordination costs, making the relationship between DOI and performance non-linear.
Models of Degree of Internationalization and Performance
Researchers have identified five major models explaining the relationship between the degree of internationalization and firm performance.
1. Positive and Linear Model
This model suggests a direct and continuous positive relationship between internationalization and performance.
- Greater internationalization → Higher performance
- Assumes international expansion always generates economic benefits
This model is among the most commonly cited in early international business research.
2. Positive but Diminishing Returns Model
Empirical evidence (Gomes & Ramaswamy, 1999) indicates that while performance improves initially, the marginal benefits decline over time.
- Performance remains positive
- Returns from international expansion gradually reduce
This occurs due to increasing managerial and coordination challenges.
3. U-Shaped Relationship
This model suggests that firms initially experience declining performance during early internationalization due to:
- Learning costs
- Cultural unfamiliarity
- Market uncertainty
Over time, as firms gain experience, performance improves, resulting in a U-shaped curve.
4. Inverted U-Shaped Relationship
In this model, firms experience:
- Initial performance gains
- Followed by declining performance after reaching an optimal level of internationalization
The decline occurs due to:
- High coordination and control costs
- Managing dispersed international operations
- Over-expansion into less profitable markets
5. Sigmoid (S-Shaped) Relationship
The most recent research proposes an S-shaped relationship, consisting of three stages (Contractor, Kundu & Hsu, 2003).
Stage 1: Negative Slope
- Initial expansion into familiar markets
- High learning and adaptation costs
- Negative impact on performance
Stage 2: Positive Slope
- Economies of scale achieved
- Better distribution of R&D and fixed costs
- Improved access to raw materials and markets
- Positive performance impact
Stage 3: Negative Slope
- Over-expansion beyond optimal international presence
- Rising coordination and governance costs
- Diminishing returns from additional markets
Although the relationship turns negative again, this phase is often shorter than the initial decline.
Significance of DOI–Performance Relationship
The relationship between internationalization and performance remains a critical topic in international business research. While internationalization is widely viewed as a success factor, no single theory has yet fully explained its effects.
The five models discussed represent attempts to explain firm behavior, but they do not provide a complete explanation of the phenomenon.
To explore how global institutions shape multinational operations, read:
FAQs
What is a multinational enterprise?
A multinational enterprise is a firm that operates and controls assets in multiple countries outside its home country.
What is the degree of internationalization?
It refers to the extent of a firm’s international operations, measured by foreign sales, subsidiaries, or geographic presence.
Does internationalization always improve performance?
Not always. Research shows linear, U-shaped, inverted U-shaped, and S-shaped relationships.
Which model best explains internationalization and performance?
The S-shaped model is the most recent and comprehensive, though no single model fully explains the relationship.
Why is internationalization important for firms?
It enables market expansion, cost advantages, economies of scale, and long-term growth.
