Intangible resources as a key factor in the internationalisation of Spanish firms

Journal of Economic Behavior & Organization Vol. 53 (2004) 477–494

Intangible resources as a key factor in the internationalisation of Spanish firms José M. Delgado-Gómez, Marisa Ram´ırez-Alesón∗ , Manuel Antonio Espitia-Escuer Departamento de Econom´ıa y Dirección de Empresas, Facultad de Ciencias Económicas y Empresariales, Universidad de Zaragoza, Gran V´ıa 2, 50005 Saragossa, Spain Received 5 December 2000; accepted 21 November 2002

Abstract In this paper we analyse the effect of the availability of intangible resources (measured by way of Tobin’s q) on the probability of Spanish firms increasing their international diversification. We find that this impact is positive and statistically significant. We also discover that firms with a higher endowment of intangible resources increase their presence in their current markets (Concentration) and that those with a multinational status also expand to new markets (Scope). © 2003 Elsevier B.V. All rights reserved. JEL classification: F23; M10 Keywords: Intangible resources; International diversification; Spanish firms

1. Introduction Nowadays most firms from developed countries are widely internationalised. Over the last decade empirical evidence supporting this phenomenon has generated an important debate that has focused on the reasons that have led these firms to choose this strategy, as well as on the competitive and performance implications of such diversification. Against this background, the aim of this paper is to deepen our knowledge on the reasons for the internationalisation of firms, given that these have been less empirically studied due to the difficulty of measuring and testing them. Relevant literature has offered numerous explanatory factors for this internationalisation, but as yet there is currently no single, integrating ∗ Corresponding author. Tel.: +34-976-76-27-16; fax: +34-976-76-17-67. E-mail address: [email protected] (M. Ram´ırez-Ales´on).

0167-2681/$ – see front matter © 2003 Elsevier B.V. All rights reserved. doi:10.1016/j.jebo.2002.11.001

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theory that justifies the international diversification of firms. However, the significance acquired by the resource-based view (RBV)1 in the 1980s has led researchers to base their explanations on a set of resources called intangible resources, which may be understood to be those assets, know-how or skills that are difficult to formalise and to be reproduced by competitors, becoming strategic assets, generators of competitive advantages for the firm and, thus, generators of benefits. However, few empirical analyses based on this approach have been carried out. In this paper, the aim is thus to analyse the importance that the availability of a firm’s intangible resources has on its decision to increase its presence in foreign markets, that is to say, its effect on international diversification. We understand international diversification or internationalisation to be the expansion towards new geographical locations beyond the national frontiers by way of foreign direct investments (FDI). In this regard, we use a sample of firms quoted on the Spanish Stock Markets during the period 1991–1997. There are three main differences with respect to previous papers. Firstly, we use Tobin’s q as a measurement of intangible resources. Whilst the literature supports this measurement, most previous researchers have not used it but rather have chosen to use simple variables that reflect some of the intangible resources, such as annual R&D expenditure or annual advertising expenditure. Secondly, we present what the type of international expansion process of firms is depending on their availability of intangible resources and how this internationalisation allows firms to accumulate or generate intangible resources that allow firms to again increase their international expansion. Finally, earlier studies have focused on countries with firms that have a greater experience in international markets, such as the United States; there are, however, no studies for countries such as Spain, whose firms have less international experience. The rest of the paper is organised as follows. Firstly, we review the different arguments given in the relevant literature, upon which we base our hypotheses. Secondly, we describe the variables and measurements and explain both the methodology employed and the sample studied. Thirdly, we present and discuss the results. The paper concludes with a brief review of the contributions and limitations of our paper.

2. Theoretical arguments and proposal of the hypotheses As defined by Ansoff (1989), international diversification is the entry of the firm into a new market and the introduction of a new technology into its markets. However, in general, researchers have only taken into account the first requirement. International diversification is therefore understood to be the expansion of the firm’s activities (current or new activities) towards new geographical locations beyond national frontiers (see Hitt et al., 1997). Many researchers offer new ideas and arguments that clarify and enable us to gain a better understanding of what international diversification actually comprises. Nevertheless, as Hoskisson et al. (1993) indicate, there is as yet no consistent theoretical structure that explains the antecedents of diversification. Important theoretical contributions, however, 1 Although there is no consensus on whether the RBV is a theory or not, most authors agree that the RBV is a useful perspective for strategic management research (Priem and Butler, 2001a,b; Barney, 2001).

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base their explanations on a set of factors that are closely related to the characteristics of the firm and on the imperfections of the markets in which that firm operates that are defined as specific or intangible resources (i.e. Buckley and Casson, 1976). Along the lines of Helpman (1984), Rugman and Verbeke (1992) and Dunning (1995) we consider that intangible resources include the availability of a superior technology, innovative capacity, managerial or production skills, organisational and marketing systems, experience of the human capital, know-how, brand image, etc. They are exclusive or specific to the firm at least for a period of time and provide it with a certain degree of superiority in comparison to its competitors; that is to say, they allow the firm to obtain sustainable competitive advantages. In this paper we do not try to justify international diversification, but simply to establish the importance of availability of intangible resources on the decision to increase the presence of the firm in foreign markets. As Caves (1996) notes, a firm’s motive for international expansion and its success are largely determined by its intangible resources. Thus, the Internalisation Theory (Hymer, 1976) posits that international expansion should take place in circumstances in which a firm can increase its value by internalising markets for certain of its intangible assets. Following this theory, Dunning (1995, 1977, 1979) introduces his Eclectic Approach or OLI Paradigm. Paradigm, examining how ownership, internalisation and location advantages explain a firm’s FDI. It is under the heading of ownership advantages that Dunning deals with the availability of intangible resources in a firm, not only giving the firm a certain degree of superiority over its competitors, but also being exclusive or specific to that firm. As Rugman and Verbeke note, these advantages emerge and are developed in the country of origin, but are easily transferable to other countries by the firm. Therefore, according to Dunning, a firm’s subsidiaries could achieve advantages that allow them to obtain a better competitive position than new firms. These advantages come from size, productive diversification and specialisation, scope and learning economies, so sharing management allows firms to achieve additional advantages for the exploitation of intangible resources, given that these can be organised with other complementary assets. Moreover, firms might also obtain advantages from their multinationalisation. As Morck and Yeung (1991) point out, a multinational firm has an advantage due to the firm-specific intangible resources or assets that allow it to overcome the adversity of doing business in a foreign location. Indeed, if these resources are information based, such as production and marketing skills, then they have some of the characteristics of public goods in that their value increases as the firm becomes more multinational in nature. On the other hand, internalisation advantages or transaction advantages are based on the benefits deriving from the joint co-ordination and control inside the firm of a set of resources located in different markets rather than their sale/purchase in the external market. Thus, firms avoid the imperfections of the market and reduce their transaction costs. It is therefore more profitable to internalise ownership advantages by means of FDI than by means of licences and contracts with other firms. Finally, location advantages arise from the combination of the previous two advantages with some available factors or inputs in the host market that allow firms to obtain higher profits. In these conditions, firms with available intangible resources (ownership advantages) expand their activities beyond national frontiers rather than increase their presence in the domestic market.

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In summary, intangible resources are the basis of a firm’s motivation to expand into new geographical markets (Dunning, 1993). We can thus formulate the following hypotheses. Hypothesis 1. The probability that a firm will become more internationalised increases with the endowment of intangible resources in the period prior to said process. We test whether a firm’s accumulation of intangible resources, which are not liable to be sold can lead the firm towards greater internationalisation in subsequent periods in order to exploit the competitive advantage that these provide for the firm. As Barney (1986) notes, resources vary in terms of their usefulness for generating value in their application to different products or businesses, depending on their higher or lower flexibility (lower or higher specificity). Thus, the nature of the underused resources is one of the determining factors in the direction taken by the diversification of the firm (Chatterjee and Wernerfelt, 1988, 1991; Montgomery and Hariharan, 1991).2 Intangible resources are easily transferable to other countries, but even more so to those markets that firms already know or to those with similar characteristics to the domestic market. Thus, firms prefer nations where they are already active to those where they are not (Davidson, 1980). Once a firm is established in a foreign market it has greater information on consumers, suppliers, competitors, and in general, on the characteristics of the market. This means that it is able to avoid high information and accommodation costs (i.e. the firm reduces uncertainty and is more easily able to overcome entry barriers). Expansion into other countries thus provides firms with scale and scope economies as it allows them to share costs amongst a greater number of markets. It also provides learning economies derived from the transfer of knowledge between businesses or markets (Chatterjee and Wernerfelt, 1988, 1991). Firms consequently achieve greater advantages by exploiting their intangible resources in other projects in that market. These benefits enhance the return from such projects and raise the priority that they are accorded. As a result of this, the previous presence of subsidiaries in a country increases the frequency of entry into said country (Davidson). We can thus formulate the following hypothesis. Hypothesis 2. The probability that a firm will increase its international expansion in those markets in which it has previous presence increases with the endowment of intangible resources in the previous period. Consequently, once firms decide to increase their internationalisation, they concentrate their activities in those markets that are already known to them. Market similarity encourages investment activity because of the ready transferability of marketing, technology, and human resources to similar countries and because of the lower levels of uncertainty that the decision-maker is faced with in such environments. These factors lead to firms preferring investments in nearby or similar countries; however, this 2 Financial resources are the most flexible ones and can thus be used for all purposes or means of internationalisation, but they generate less value for the firm. Tangible resources are easily interchangeable between businesses and markets, so that this type of resources can encourage internationalisation by way of direct exports. Finally, intangible resources are characterised by their high specificity (or low flexibility), encouraging internationalisation by means of direct foreign investments.

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preference diminishes once firms become established in other foreign countries (Davidson). The international process does not, therefore, end with the entry of the firm into one country since the experience and knowledge obtained in this process frequently facilitates the expansion of the firm towards other countries in order to continue with a progressive global expansion (Welch and Luostarinen, 1988). However, as Delios and Henisz (2000) note, the capabilities required to compete in a new market successfully can differ significantly from the ones that are needed to obtain success in existing markets. Firms have to develop new capabilities that are suited to the host market. The internationalisation of firms allows them to obtain new intangible resources (mainly information, knowledge and experience) from sharing management between several businesses, from their bigger size or from the multinationalisation process itself (Dunning, 1995). Moreover, the accumulation of international experience allows firms to reduce the cost of entering a new host country (Hymer) because they can absorb the disadvantages of acting in a new economic, legal and cultural environment more quickly (Beamish, 1988). A multinational firm’s experience thus contributes in two ways to the success of international expansion. On the one hand, experience generates new capabilities that help to offset the liability of being a foreigner. On the other hand, experience also contributes to the adaptation of existing intangible assets to improve a foreign subsidiary’s competitiveness in the host market (Delios and Beamish, 2001). The greater the presence of the firm in different markets, the more opportunities it has to gain higher levels of information, knowledge and experience (intangible resources). Subsequently, according to this hypothesis, firms expand their activities, entering new international markets that may or may not be similar to the original or previous markets. We thus formulate the following hypothesis. Hypothesis 3a. The greater the internationalisation of the firm is, the greater its availability of accumulated intangible resources is. Hypothesis 3b. The probability that a firm will increase its international expansion in new markets increases with the endowment of intangible resources in the event that the firm has a multinational status. As Davidson concludes, firms with extensive experience exhibit less preference for similar and familiar markets. Markets that others may perceive as less attractive because of high levels of uncertainty are given increased priority as the firm’s experience rises. As firms gain experience, the location of foreign investment activity is increasingly an efficient response to global economic opportunities and conditions.

3. Variables, measurements, methodology and sample In this section we consider the variables used, the justification for their use, measurement and calculation, as well as the sample and the methodology employed in the statistical analyses.

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3.1. Variables and their measurement 3.1.1. Increase in the degree of internationalisation We have taken four qualitative variables that are used as dependent variables to measure the increase in the degree of international diversification. In this way we are able to cover the different dimensions reflected in the hypotheses. These variables derive from information obtained from the global market diversification index, the number of foreign subsidiaries of the firm, the number of countries in which the firm has foreign subsidiaries and the mean number of subsidiaries in every country. The global market diversification index3 reflects the dispersion of the activities carried out by firms in heterogeneous geographical regions. We have grouped the world environment into six different homogenous regions (that maintain the homogeneity within each group and the heterogeneity between them) based on political and economic conditions.4 The six areas defined are the European Union, North America,5 Tax Havens,6 other Developed Countries, Latin America, and other Developing Countries.7 The formula for this measurement, which is based on the percentage of subsidiaries owned by a firm in region a over the total number of foreign subsidiaries (fa ), is as follows: A
GMD = − fa ln fa .

(1)

a=1

The value it takes increases with the degree of international diversification of the firm; thus, if this increases during the period analysed, it is assigned a value of 1, and otherwise 0. This dummy variable is called dGMD. However, global market diversification presents some problems when the firm has not spread its activities in different areas. For example, the value of this index for a firm that has all its subsidiaries in one single area or country would be the same as that of another with no subsidiaries; the value in both cases would be zero. To solve this problem, we also use the number of foreign subsidiaries of the firm. Several authors, such as Errunza and Senbet (1984) or Sambharya (1995), have used this measurement. If the number of subsidiaries of a firm increases in a year, the dummy variable used (dSUBS) is assigned a value of 1, and otherwise it is 0. Both variables (dGMD and dSUBS) thus reflect the increase in the degree of international diversification of a firm and are used to test the first hypothesis. The ratio of number of subsidiaries to number of countries reflects the strategy or direction of international diversification followed by the firm. It thus reflects whether the firm chooses 3

Miller and Pras (1980), earlier developed by Hirsch and Lev (1971). Most authors follow these criteria (Hirsch and Lev, 1971; Miller and Pras, 1980; Errunza and Senbet, 1984; Kim et al., 1989, 1993; Hitt et al., 1997). 5 In this area we include the United States of America, Canada, Mexico and Puerto Rico. 6 The countries included within the Tax Haven area are those considered as such according to the Spanish Royal Decree 1080 of 5 July 1991. 7 We follow the criteria established by the World Bank (2000) to differentiate between developed and developing countries. 4

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to concentrate its activities in a few markets or to spread its businesses in several markets but with a low presence in those markets. A high value of this ratio would mean that the firm chooses to locate its subsidiaries in the same countries (high concentration) whilst a low value would mean that the firm spreads its activities over more countries (low concentration). From this information, we obtain the third dummy variable (dCONC) that takes a value of 1 if this ratio increases over a given period, and otherwise 0. dCONC is thus the dependent variable used to test the second hypothesis. Finally, the number of countries in which the firm has foreign subsidiaries reflects the scope of the firm’s internationalisation (i.e. Tallman and Li, 1996). A high value for this variable would mean that the firm chooses to locate its subsidiaries in a large number of different markets (high internationalisation). Following the same criteria as the previous variables, when the firm decides to increase the number of countries, then the variable termed dSCOPE is assigned a value of 1; otherwise it is 0. This variable (dSCOPE) is used to test Hypothesis 3b. 3.1.2. Measurement of intangible resources Intangible resources are the most difficult to observe and to be measured by an external agent because they are not included in firms’ accounting records. For this reason, they are considered as ‘invisible’ assets (Itami, 1987). Due to the difficulty in measuring intangible resources, most empirical studies have used simple variables, such as R&D expenditure with regard to sales (e.g. Dunning, 1980) and/or advertising expenditure with regard to sales (e.g. Heeley et al., 1999). The first is an approximation to obtain the firm-specific assets that are generated by research and development activity; the second assumes that money spent on advertising and marketing generates firm-specific assets in the form of brand recognition and product differentiation. However, most researchers use both in their analyses to reflect intangible resources (e.g. Montgomery and Wernerfelt, 1988; Montgomery and Hariharan, 1991; Allen and Pantzalis, 1996). Other authors have argued that the market value of the firm will reflect both tangible and intangible factors (Hirschey and Wichern, 1984). Ross (1983) and Hirschey and Weygandt (1985) recommend a marked value-based approach as an attractive means for determining the asset-like characteristics of advertising, R&D, and other such expenditures. According to Hirschey and Weygandt (1985) and Morck and Yeung (1991, 1992), the market value of the firm [MV(F)] can be expressed as the capitalised values of profits attributable to tangible assets [MV(T)] plus the capitalised values of profits attributable to intangible assets [MV(I)]: MV(F) = MV(T) + MV(I).

(2)

While the market value of the firm is observable, MV(T) and MV(I) are not. However, accounting book values and replacement cost values can be viewed as useful, although imperfect, measures of the market value of tangible assets. Using these accounting data, one may, in principle, isolate the market value effects of tangible assets from any additional influences of intangible assets such as goodwill, market power, brand loyalty, patents, etc.

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We can obtain a measure commonly referred to as the “q ratio” or Tobin’s q by dividing the previous expression [MV(F)] by the replacement cost of tangible assets [RC(T)]: q=

MV(F) . RC(T)

(3)

If we ignore measurement errors, a value of q that is greater than 1 indicates valuable intangible assets that are not reflected in replacement cost data. Thus, if we consider the effects of advertising and R&D on q, we can discover whether or not such expenditures give rise to intangible capital. Given that MV(T) = RC(T), for test purposes,   MV(I) q=1+ (4) = f1 (AD, R&D, X), MV(T) where AD is the advertising expenditure, R&D the research and development costs, and X is a vector of additional factors which influence q. Other important X factors are market structure, future investments expected to earn above-normal rates of return and the degree of stability such returns show. Similarly, Montgomery and Wernerfelt (1988) define Tobin’s q ratio as:8 q=

MV(F) VI + V C + V R + V E =1+ , RC(T) RC(T)

(5)

where MV(F) is the market value of the firm, RC(T) the replacement value of physical assets, VI the value of intangible assets purchased by the firm, VC the value of collusive relationships with competitors, VR the capitalised Ricardian rents, and VE the disequilibrium effects. In both cases the value of intangible assets and the expected future rents influence the market value of the firm and, consequently, Tobin’s q. Grant (1995), basing his arguments on the resource-based view, establishes that most of these rents originate from the firm’s resources, mainly from those of an intangible nature such as scale and experience economies, brand loyalty, patents, etc. Therefore, the capitalisation of these future rents would be a way of valuing these intangible resources. Moreover, Teece et al. (1994) point out that Tobin’s q value can reflect the technical and organisational competence of the firm, that is to say, its specific assets. The existence of organisational competence explains why plant and equipment produces more when owned by one firm rather than another. Lang and Stulz (1994) suggest that the market valuation ratio is a measurement of the contribution of the intangible resources to the market value of the firm. We can thus conclude that Tobin’s q ratio is not only an adequate approximation to the intangible resources but is also better than the other variables used in the literature. It reflects not only R&D and advertising expenditures but also the advantages that come from better knowledge, experience, human resources, organisational structure and so on. We therefore use Tobin’s q as the measurement to reflect such resources. It should, however, be noted that we do not aim to quantify the amount of intangible resources in monetary units, but rather to use this data in order to carry out a comparison between firms. In this way, we can 8

The nomenclature has been changed for comparative purposes.

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analyse the impact of the availability of these resources on the internationalisation of the firm. We divide the level of the firm’s intangible resources (Tobin’s q) by the median9 value of Tobin’s q obtained for the industry in which this firm is included,10 in order to eliminate inter-industry variations in the availability of intangible resources of a firm. We call this independent variable Intangible. As Chatterjee and Wernerfelt (1991) note ‘the requirement for intangible assets varies greatly from industry to industry’ (p. 41). Some industries require a higher level of intangible resources, or their generation is more costly than others in order to obtain ownership advantages that could be used by the firm in its international expansion. Although Tobin’s q is a relatively simple measurement from a conceptual point of view, in practice it is not easy to measure. It is based both on the accounting information available from the firm’s Annual Report and on market information. The difficulty lies in how to make the measurement of the market value of the firm and the replacement value of the assets operative. The methodology employed to estimate this ratio is based on Lindenberg and Ross (1981), but its application to the firms in our sample has required some adjustments. First, we have applied an industrial correction factor to the firms in the sample for 1991 in order to obtain an approximation of the replacement value.11 This problem has, in turn, prevented us from calculating the rate of technical progress of the firms in our sample. Nevertheless, as an approximation we have considered the average industrial rate obtained from a separate sample12 of similar characteristics. 3.1.3. Other variables In order to test the Hypotheses 3a and 3b, we have to differentiate between multinational and non-multinational firms. According to the criteria employed by Vernon (1971) and Horst (1972), we consider that a firm with at least six foreign subsidiaries is a multinational firm (MNE), and a firm that does not fulfil this criterion is thus considered to be non-multinational (1 − MNE). We also introduce a control variable that measures the size of the firm by the natural logarithm of sales. In order to eliminate inter-industry variations in this variable too, we have divided it by its median industrial value (Size). With this variable we try to explain the greater possibility and availability of large firms to exploit their intangible resources in foreign markets. 9 We use the median instead of the mean in order to avoid the bias that could result from high or low values in the sample since the number of firms in each industry is not really high. 10 The distribution by industries has been carried out with reference to the main activity of the parent firm, classified according to the criteria adopted by the Organisation for Economic Co-operation and Development (1997). The sectors are: (1) food products; (2) textile and wood activities; (3) petroleum, chemical, rubber and plastic products; (4) metal and mechanical products; (5) machinery, communications and transport equipment and motor vehicles; (6) electricity, gas and water; (7) construction; (8) transport and communication; and (9) real estate and business activities. 11 The last set of rules for the restatement of asset values applicable at a national level in Spain are those of 1983. Thus, the accounting records of the firms in the sample for 1991 are not valued at replacement cost, and the correction factor is thus applied. This factor is obtained on the basis of an available sample of 101 firms, which were quoted on the Spanish Stock Markets during the period 1961–1991. 12 This takes the form of a sample of 101 firms that were quoted on the Spanish Stock Markets during the period 1961–1991. It allows us to approximate the rate of technical progress of the firm and its market value.

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3.2. Sample We have used a sample of 96 non-financial firms quoted on the Spanish Stock Market every year during the period from 1991 to 1997.13 With this information we make four observations per firm: in the case of international diversification these correspond to its increase over 1 year (1993–1994, 1994–1995, 1995–1996 and 1996–1997), and for the intangible measurement, to the Tobin’s q values with respect to 1992, 1993, 1994 and 1995. A total of 384 observations are thus made. Most of the information has been taken from the firm’s Annual Reports lodged with the Spanish Securities and Exchange Commission. Annual Reports provide the accounting data required, as well as information on the location and number of subsidiaries14 of the firm for every year of the sample. The reasons for concentrating on such firms are twofold. First, the data provided by this Commission offers a certain minimum guarantee in so far as their reliability and precision; second, the Tobin’s q calculation requires the market value of the share (the quote). As regards this market value measurement, we required additional information that was obtained from the Spanish National Accounting Statistics15 and from another sample available to the authors.16 3.3. Methodology In order to test whether the availability of a firm’s intangible resources allows an increase in the degree of internationalisation, we have used a general model similar to the investment models. In our model, the increase in internationalisation (It /It−1 )17 is a function of the availability of the intangible assets of the firm in lagged periods (Intangiblet−i ). We use it lagged, in particular 2-year lagged, in order to avoid the problem of endogeneity. The internationalisation process is likely to increase the availability of intangible resources of firms, mainly international knowledge and experience (Welch and Luostarinen, 1988; Dunning, 1995). Following this we present four models (for the four dependent variables defined earlier) in order to test the proposed hypotheses. In the first, It = F [β0 + β1 Intangiblet−2 + β2 Sizet−2 ], (6) It−1 It /It−1 is measured by the variables dGMD (Model 1, Hypothesis 1) and dSUBS (Model 2, Hypothesis 1), and dCONC (Model 3, Hypothesis 2). On the basis of the arguments presented above we expect the coefficients of both variables (β1 , β2 ) to be positive. For the second, dSCOPE = F [γ0 + γ1 Intangiblet−2 + γ2 Intangiblet−2 MNE + γ3 Sizet−2 ], 13

(7)

In order to calculate Tobin’s q ratio, historical information is required, making 1991 necessary. It should be noted that we have only been able to consider those subsidiaries in which a significant share is held due to the lack of complete information for Spanish firms. 15 These provide information on inflation, the industrial price index and the gross fixed capital stock index. 16 See note 12. 17 Previously measured by means of each one of the four variables: dGMD, dSUBS, dCONC, and dSCOPE. 14

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the expected signs for the coefficients γ 1 , γ 2 and γ 3 would be positive (Model 4, Hypothesis 3b). In particular, if γ 2 is positive, it would reflect that the marginal effect of the Intangible variable is positively affected by the multinational status. It must be emphasised that our objective is not to determine the factors that have an impact on increasing internationalisation, but to analyse the importance of the availability of a firm’s intangible resources. We use the fixed and random effects logit procedure to test these hypotheses. A fixed effects logit model that accounts for the heterogeneity is18 

Prob(yit = 1) =

eαi +β xit = Fit .  1 + eαi +β xit

(8)

Chamberlain (1980) suggests an approach to estimating this model with data sets with large n (number of individuals) and small T (periods of time). In particular, he suggests maximising the conditional likelihood function    
  c L = (9) Prob Yi1 = yi1 , Yi2 = yi2 , . . . , YiT = yiT  yit .  t

i

That is, the likelihood for each set of T observations is conditioned by the number of 1’s in the set. With homogeneity, the model can be estimated as a logit model. We then have to test whether there is heterogeneity or not. In order to test it, we use Hausman’s specification test that can be based on the χ2 statistic: χ2 = (βˆ CML − βˆ ML ) (Var[CML] − Var[ML])−1 (βˆ CML − βˆ ML ).

(10)

Under the null hypothesis of homogeneity, both Chamberlain’s conditional maximum likelihood (CML) estimator and the usual maximum likelihood (ML) estimator are consistent, but Chamberlain’s is inefficient. Under the alternative hypothesis, the unconditional ML estimator is inconsistent, while Chamberlain’s estimator is consistent and efficient. The random effects model is an alternative to the Chamberlain’s fixed effects model for the binary logit case. The model is Prob(yit = 1) =

1  1 + e−(β xit +vi )

,

(11)

where vi is the individual effect. If vi is constant, the model reduces to the simple binary logit model. If vi is treated as constant rather than random, then the fixed effects model arises, and inference is made conditionally upon the vi ’s. The statistical software used to compute the estimators was Limdep 7.0. Finally, Hypothesis 3a is checked by using an analysis of variance (ANOVA) procedure to detect a difference in the endowment of intangible resources between multinational and non-multinational firms. 18

See Greene (1993) or Maddala (1987).

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Table 1 Descriptive statistics

Intangible Intangible × MNE Intangible × (1 − MNE) Size dGMD dSUBS dCONC dSCOPE a

Number

Mean

S.D.a

384 103 281 384 384 384 384 384

1.11 1.21 1.07 0.99 0.13 0.22 0.20 0.19

0.55 0.49 0.57 0.16 0.33 0.42 0.40 0.39

Standard deviation.

4. Results and analysis First, we present a summary of the basic descriptive statistics for the variables used (mean and standard deviation) in Table 1. The estimations of the proposed models obtained by means of the binomial logit model, the fixed (Chamberlain’s conditional likelihood) and random effects logit model for panel data are set out in Table 2. The results obtained with the latter procedure (random effects) show us that the coefficients of the random effects variable (vi ) for each model (from Model 1 to Model 4) are not significant, that is to say, we do not observe random effects (vi is constant). Moreover, the results of the Hausman test (Chamberlain’s fixed effects) lead us not to reject the hypothesis of homogeneity in all the proposed models. We do not detect firm-specific effects that allow us to reach the conclusion that there is unobserved heterogeneity in the dependent variable used in each model. The correct estimation for our four models would thus be the binomial logit model with the non-existence of fixed or random effects. The main results obtained are presented below. With respect to the analyses carried out to test the first hypothesis (Models 1 and 2), we find that the coefficient of the variable that reflects the intangible resources of the firms is 0.695 for the variable dGMD and 0.811 for dSUBS, both being significant (P < 0.01). The McFadden’s R2 obtained are 16.76 and 20 percent, respectively, and the χ2 is significant at more than 99 percent. These results would therefore appear to confirm Hypothesis 1. Firms that possess more intangible resources in relative terms, compared to the rest of the firms in the same sector and at a given moment in time, have a greater tendency to increase their degree of internationalisation in subsequent periods. We can find similar results in several empirical studies. Horst (1972), using a sample of firms from US and Canada, concluded that the intangible resources of a firm (measured by means of R&D expenditure) have an important effect on the decision of investing abroad. Subsequently, Grubaugh (1987) repeated the study, but only for US firms, reaching the same conclusion. Denekamp (1995), who expresses the level of US FDI in an industry as a linear combination of three proxies for intangible assets, also obtained this result. Recently, Berry and Sakakibara (1999) have demonstrated that

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Table 2 Importance of intangible resources in international diversification (panel logit analyses)a Hypothesis 1 Model 1 (dGMD) Binomial logit model Intangible Intangible × MNE Size Constant χ2 McFadden’s R2 (%)b

0.695∗∗∗ (0.28)

Model 2 (dSUBS) 0.811∗∗∗ (0.23)

Hypothesis 2

Hypothesis 3b

Model 3 (dCONC)

Model 4 (dSCOPE)

0.754∗∗∗ (0.24)

6.895∗∗∗ (1.18) 7.853∗∗∗ (1.13) 7.923∗∗∗ (1.15) −10.015∗∗∗ (1.37) −10.32∗∗∗ (1.27) −10.524∗∗∗ (1.30) 48.49∗∗∗ 16.76

81.71∗∗∗ 20.00

76.61∗∗∗ 20.05

Fixed effects logit model for panel data (Chamberlain’s conditional likelihood) Intangible 0.336 (0.81) 0.324 (0.70) 0.024 (0.68) Intangible × MNE Size 1.84 (8.83) 3.210 (9.87) −1.596 (9.67) Hausman test (degree of freedom)

0.603 (2)

Random effects logit model for panel data Intangible 0.547∗∗ (0.22) Intangible × MNE Size 3.780∗∗∗ (1.20) Constant −3.882∗∗∗ (1.50) Random effects −0.238 (0.55) Number of observations Number of events

384 48

0.368 (0.28) 0.634∗∗∗ (0.25) 5.369∗∗∗ (1.20) −7.728∗∗∗ (1.32) 66.31∗∗∗ 17.75 0.679 (0.69) −0.075 (0.45) −9.773 (9.07)

0.791 (2)

2.294 (2)

6.901 (3)

0.646∗∗∗ (0.22)

0.554∗∗∗ (0.19)

4.464∗∗∗ (1.26) −4.186∗∗∗ (1.37) −0.399 (0.365)

4.161∗∗∗ (1.06) −3.923∗∗∗ (1.18) −0.241 (0.37)

0.356 (0.26) 0.208 (0.25) 3.163∗∗ (1.39) −2.284 (1.51) 0.252 (0.35)

384 86

384 76

384 73

a

Values in parentheses are standard errors. McFadden’s R2 = 1 − (log likelihood at convergence/log likelihood with constant term only). This provides a measurement of the explanatory power of the model, similar to the value of R2 in OLS regression. ∗∗ P < 0.05 (according to the Wald’s statistic). ∗∗∗ P < 0.01 (according to the Wald’s statistic). b

an increase in the level of intangible resources produces an increase in the FDI flows by Japanese manufacturing firms. The fact that this same result is given for both internationalisation variables indicates that this higher degree of foreign presence is reflected in two ways: first, in an increase in the number of subsidiaries in absolute values (dSUBS) and, secondly, in an increase in the degree of international diversification of the firm (dGMD). With regard to this latter variable, together with the greater foreign presence (more direct investments), other characteristics of internationalisation are also implicitly reflected. These take the form of a greater scope in investments (an increase in the number of countries or areas to which they are directed) and a higher concentration (the consolidation of the areas or countries where the firm was already present, by way of new investments). We will now try to isolate these two characteristics of internationalisation that appear to be latent in the GMD variable by analysing the two remaining models (3 and 4).

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Using Model 3, related to the dCONC variable, we analyse the effect of intangible resources on the concentration of investments in certain locations. In Table 2 it can be seen, as in the previous case, that the coefficient that accompanies the intangible resources variable is positive and significant (0.754; P < 0.01) and that the McFadden’s R2 is of approximately 20 percent (χ2 = 76.61; P < 0.01). We can conclude that those firms that possess a higher level of intangible resources with respect to the industry median will tend to direct their new international investments to those locations where they have already been present for some time, thus increasing their international concentration. The second hypothesis is therefore not rejected either. Those firms that accumulate an excess of intangible resources in a given period and make FDI will do so, with a greater probability, in international markets where they already have a presence. Yu (1990), in an analysis of investment decisions by US firms in Japan, found that previous experience in one country induces subsequent investments in the same country. Chang and Kogut (1993) and Hennart and Park (1994) confirm this result for Japanese firms. Firms benefit from synergies or other types of advantages obtained from the activities carried out in their previous investments. Firms thus exploit their intangible resources by means of new investments in the same host country, having overcome the entry barriers or the inherent disadvantages of operating abroad in an unfamiliar environment. Moreover, the availability of intangible resources allows firms to exploit these resources to erect entry barriers. In order to test whether firms with greater international expansion (multinational firms) have more accumulated intangible resources (Hypothesis 3a), we have carried out an ANOVA analysis (Table 3). When we analyse the availability of intangible resources for multinational or nonmultinational firms, we find that multinational firms have a higher value (1.21) than their non-multinational counterparts (1.07), and that this difference is statistically significant (P < 0.05). Thus, these results lead us to conclude that multinational firms do indeed have a higher level of accumulated intangible resources. In light of this result, we confirm the theoretical arguments that consider that internationalisation generates opportunities to accumulate intangible resources. Finally, by means of Model 4, which corresponds to the last of the variables (dSCOPE), our aim is to test Hypothesis 3b. We set out to analyse whether the firms with a greater degree of internationalisation, which has allowed them to accumulate more intangible resources (international experience, greater access to the input markets, better information on consumers, etc.), have a greater tendency to expand towards new international markets. Similarly, we consider the opposite situation, whereby less internationalised firms and thus

Table 3 Difference in the endowment of intangible resources between multinational and non-multinational firms (ANOVA) Sum of squares

d.f.

Mean squares

F-ratio

F probability

Between groups Within groups

1.318 115.311

1 382

1.318 0.302

4.367

0.037

Total

116.629

383

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those with a lower availability of intangible assets, will have lower probabilities of carrying out such expansion into new markets. The results obtained from the logit analysis confirm this third hypothesis. We can see from Table 2 that the coefficient that accompanies the level of intangible resources for multinational firms is significantly different to zero (0.634; P < 0.01). That is to say, the marginal effect of the intangible is positively affected by the multinational status. Furthermore, we obtain a McFadden’s R2 of 17.75 percent (with χ2 significance). The growing foreign presence can be attributed to firms accumulating knowledge on country-specific markets, or ‘experiential knowledge’ (Barkema et al., 1996). This knowledge, which is needed to operate in any country, is not easy to acquire, making it a critical resource. All this would seem to imply that those firms that possess a high level of intangible resources in relation to the industry median tend to invest in new foreign locations, provided that these firms already have significant previous experience in the international environment. By contrast, those firms with a low level of previous international experience will have less probability of increasing the scope of their international presence. In this case, firms that opt to increase their international presence will do so in markets in which they have had an earlier presence; that is to say, they will increase their international concentration. As Cohen and Levinthal (1990) note, learning is most efficient in the proximity of an existing base of knowledge since a firm’s absorptive capacity depends on its prior, related knowledge. Thus, the accumulated knowledge, which is critical for a firm, will have an impact on its later growth. It can therefore be confirmed that those firms with a certain level of accumulated international experience could exploit that fact by way of new subsidiaries in markets that are different from the current ones. This conclusion confirms the arguments established by Johanson and Vahlne (1977, 1990) that firms tend to operate in the vicinity of existing knowledge and that once initiated, the internationalisation process proceeds incrementally, regulated by the experience-based accumulation of foreign organising knowledge. Finally, it should be indicated that the control variable that reflects the size of the firm is positive and significant for all the models. This is the expected result given that, as indicated throughout the length of the literature, internationalisation and size are highly correlated. To summarise, we can conclude that the presence of intangible resources in a firm in earlier periods leads to greater international diversification in subsequent periods. Therefore, the availability of intangible resources is a key factor in the decision by firms to increase their internationalisation. Furthermore, we can note that firms opt for progressive international expansion in function of the availability of their intangible resources. Thus, at the outset, those firms that possess a high level of intangible resources in relation to their sector will tend to improve their competitive position by way of new investments in those markets where they have previous experience. This consolidation of the firm in these new markets will, in turn, allow it to increase its international knowledge, information and experience. It will allow it to generate and accumulate greater intangible resources that can be transferred to new markets, thereby generating competitive advantages. Once the firm finds itself in this situation it will tend to increase its degree of internationalisation both in terms of concentration (the same locations) and scope (new locations).

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5. Conclusion The internationalisation of firms, together with the presence of intangible resources within firms, has become the subject of extensive study over the last decade. Numerous internationalisation theories have considered the availability of intangible resources owned by the firm to be the key factor in the internationalisation of that firm. However, only a few empirical analyses have addressed this issue, and even fewer in the case of Spanish firms. Against this background, this paper highlights the relationship between intangible resources and the increase of international diversification of a firm, with specific reference to a sample of Spanish firms. In this regard, we have found that the availability of intangible resources in a firm has a positive effect on its increase in international diversification. This result is in agreement with the theoretical arguments offered in the relevant literature. Moreover, we have focused on the firm’s intangible resources in relation to their internationalisation strategies. The availability of intangible resources leads the firm to consolidate its competitive position in those markets in which it has previous presence. As a result of this greater international activity, the firm generates or accumulates a higher level of intangible resources. We have confirmed that multinational firms have a higher level of intangible resources than non-multinational firms; moreover, we have shown that the marginal effect of the endowment of a firm’s intangible resources on the decision to increase its internationalisation in new foreign markets is positively affected by the multinational status. Therefore, the availability of intangible resources has an impact not only on the degree of international diversification, but also on the direction that such diversification takes. Our paper can be differentiated from earlier studies by the way in which the intangible resources are measured. In this regard, most authors select one or more variables to reflect some of the intangible resources; by contrast, we use Tobin’s q as a unique measure that allows us to reflect these resources. We analyse the impact of intangible resources on the decision by the firm to increase international diversification, rather than on the degree of internationalisation. However, this present study has one particular limitation, namely the possible bias in the results resulting from the selection of firms for analysis. The firms selected are larger than the average-sized firm in Spain because they are listed on the Spanish Stock Markets. A broader sample, in terms of size, would have been more interesting but required information on smaller Spanish firms that is not available. Despite this, we believe that the study represents a useful step in the analysis of the intangible resources and international diversification of Spanish firms. Acknowledgements This work has been financed by the CICYT-FEDER Research Project SEC2002-00835. References Allen, L., Pantzalis, C., 1996. Valuation of the operating flexibility of multinational corporations. Journal of International Business Studies 27, 633–653.

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