Information Costs in International Business: Analyzing the Effects of Economies of Scale, Cultural Diversity and Decentralization

The relationship between internationalization and performance is controversial. Prominent in the theoretical arguments about a performance downturn in internationalization are increasing information, coordination, and management costs—an argument for which empirical insights are lacking. Building on a model of information cost, we test for the development of internal information costs during internationalization. Applying a panel procedure on a data set of top manufacturers observed over a 7-year period, we analyze the effects of economies of scale, multinationality or host market diversity and international organizational decentralization on internal information costs. Although internal information costs decline due to economies of scale in international business, they are especially affected by the degree of host market diversity: a growing cultural diversity increases internal information costs per unit. Finally, we find that after a phase of first organizational adaptation processes, international organizational decentralization (and therewith complexity) rises internal information costs. Information cost development plays a major role in theories referring to a performance downswing in a phase of high or culturally unrelated internationalization involving strong organizational complexity. Our results offer empirical backing for these arguments on internal information costs (incorporated into an information cost model).