International Expansion and Foreign Divestment: What Do We Know and What Have We Learned?

MAR-APR 2018|BY DR. GEORGIOS BATSAKIS, ASSISTANT PROFESSOR OF INTERNATIONAL BUSINESS, ALBA GRADUATE BUSINESS SCHOOL, THE AMERICAN COLLEGE OF GREECE
In pursuit of improving their profitability and increasing their global market share, many multinational corporations tend to rapidly expand their operations in multiple new markets within a very short period of time.

At the same time, such corporations might not have developed the necessary corporate knowledge, international experience and competent skills in terms of how to effectively deal with, first, rapid international expansion and the pressures that might result from such a rapid redeployment of corporate assets, and second, the pressures stemming from host markets’ institutional idiosyncrasies (e.g. corruption, bureaucracy, inefficient public sector, adaptation to cultural characteristics).

Accordingly, while rapid international expansion can to a certain extent improve the financial performance of multinational corporations1, especially of those firms that hold unique firm-specific capabilities, it can also lead to the subsequent divestment of international operations. The question that arises is, why do multinational corporations divest their foreign operations immediately after rapid international expansion?

An educated guess would posit that this is due to problems stemming from limited cash flow, a high debt to equity ratio, and diminishing demand for the products they offer. This means that such firms would have to close down or sell off some of their operations due to subpar performance. However, our recent research on the international expansion of the world’s largest retail firms2shows that rapid international expansion also means that available managerial resources are no longer able to satisfy organizational demands for planning and learning from overseas operations, due to managers’ limited time and capacities. Firms that spend insufficient time planning an international expansion are more likely to make errors; for instance, with regard to market selection. Rapid internationalization reduces the time available to managers to collect and assess information about overseas expansion, thereby increasing the likelihood of incorrect assessments and suboptimal decisions.

So how can such multinational corporations reap the benefits of rapid internationalization? Our research shows that firms expanding towards neighboring countries or countries within the same region and firms having already acquired a high level of international experience are more capable of offsetting the complexities arising from rapid international expansion. The verdict is that firms’ managerial resources are limited and may not be fungible across geographic regions. Firms need to be proactive in their internationalization strategy and consider not only the financial resources they hold but also whether they have the necessary amount of managerial resources needed to take the plunge.

1Mohr, A., & Batsakis, G. (2017). Internationalization speed and firm performance: A study of the market-seeking expansion of retail MNEs. Management International Review, 57(2), 153-177.

2Mohr, A., Batsakis, G., & Stone, Z. (2018). Explaining the effect of rapid internationalization on horizontal foreign divestment in the retail sector: An extended Penrosean perspective. Journal of International Business Studies (in press).

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