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The risk implications of multinational enterprise

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Abstract:

Purpose ‐ Multinational structure has been linked to operational flexibilities that can improve corporate adaptability and a knowledge-based view suggests that multinational resource diversity can facilitate responsive opportunities. The enhanced maneuverability from this can reduce earnings volatility and hence the corporate performance risk. But, the internationalization process may also require irreversible investments that increase corporate exposures and leave the risk implications of multinational enterprize somewhat ambiguous. Hence, the purpose of the paper is to present an empirical study of the implied relationships between the degree of multinationality and various risk measures including downside risk, upside potential, and performance risk. Design/methodology/approach ‐ The paper provides a brief literature review, develops hypotheses, and tests them in two-stage least square regressions on archival data to control for pre-selection biases. Findings ‐ The analyses indicate that multinationality is associated with lower downside risk as well as higher upside potential and leads to reduced performance risk. The study finds no trace of diminishing effects from higher degrees of multinationality. Research limitations/implications ‐ The empirical study uses a sample of large US-based corporations, which could affect the generalizability of results. However, this is consistent with other studies and eases comparability of findings. Practical implications ‐ The findings add to the ongoing debate about the risk effects of a multinational corporate structure and confirms that a diverse multinational presence is associated with positive risk outcomes. Originality/value ‐ The paper complements a limited number of studies with equivocal results and adopts alternative risk outcome measures. The study extends the industry scope by introducing a comprehensive sample of firms operating in different manufacturing and service businesses.

Keywords: International organizations; Multinational companies; Risk management

Document Type: Research Article

DOI: https://doi.org/10.1108/19348831111121303

Publication date: 2011-03-15

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