Turning the Tables: The Relationship Between Performance and Multinationality

The abundant research on the multinationality-performance relationship has yet to provide cohesive findings concerning the nature and shape of the relationship. This paper joins a small, but growing body of research considering the effect of performance on multinationality. Drawing on resource-based theory and prospect theory, the authors develop competing hypotheses for the impact of performance on multinationality. Using non-linear ordinary least squares regression on unbalanced panel data for 2066 firm-year observations of Swedish publicly listed firms over 12 years, the authors find strong support for a positive U-shaped relationship. The foremost contribution is that performance drives internationalization, much more than vice versa. The model for the traditional causal direction from multinationality to performance explains less than half the variance, has marginal significance on key variables, and has an illogical outcome. Another contribution is how risk-taking attitudes, in accordance with prospect theory, explain a high level of internationalization when performance is negative. As performance rises towards zero, internationalization drops to an inflection point, where in accordance with resource-based theory, the degree of internationalization begins rising. This debunks the prevalent view that internationalization is contingent upon positive performance and abundant resources.