Does multinationality lead to value enhancement? An empiricalexamination of publicly listed corporations from Germany

Stefan Eckert a,*, Marcus Dittfeld a, Thomas Muche b, Susanne Rassler c

a International Management, International Graduate School Zittau, Germanyb Business Administration, Corporate Planning, and Energy Management, University of Applied Sciences Zittau/Gorlitz, Germanyc Department of Statistics and Econometrics, University Bamberg, Germany

1. Introduction

In 2002, Peter Buckley raised the question whether the International Business research agenda would be ‘‘. . .running outof steam’’ (Buckley, 2002, 365). Two years later Mike Peng replied, ‘‘What determines the international success and failure offirms?’ has always been the core question of International Business (IB) that has served to unite most (. . .) IB researchers andto delineate IB’s boundaries relative to other fields’’ (Peng, 2004, 102). The questions whether multinational companies doperform better than national ones and which conditions have to be met in order to realize performance increases throughfirm internationalization have always been at the heart of International Business research (Verbeke & Brugman, 2009;Verbeke, Li, & Goerzen, 2009). Hymer (1976) asked why multinational firms are able to compete against domesticcompetitors that are more familiar with the business environments of their home countries. Aharoni (1966) examinedwhether foreign direct investment decisions are the outcome of rational decision-making, a condition which can besupposed to contribute significantly to successful internationalization. In the 1970s Johanson and Vahlne (1977) argued thatdecisions to internationalize are taken in order to maintain a certain performance level, not to maximize profits (see also

International Business Review 19 (2010) 562–574

A R T I C L E I N F O

Article history:

Received 12 May 2009

Received in revised form 31 March 2010

Accepted 6 April 2010

Keywords:

Economies of scale

Geographical diversification

Germany

Industrial diversification

Intangible assets

MNCs

Shareholder value

Tobin’s Q

A B S T R A C T

We analyse the impact of multinationality on shareholder value in the case of German

firms for the time span from 1990 to 2006. Based on a sample of 13,130 firm-year

observations, we find that multinational companies perform worse in terms of

shareholder value than domestic companies. This relationship remains stable even after

controlling for industrial diversification. However, using a multivariate regression model,

the impact of multinationality on shareholder value turns out to be positive. Obviously, the

relationship between multinationality and shareholder value seems to be a classical

example of Simpson’s paradox. Therefore, bivariate analysis of the effects of multi-

nationality on shareholder value must be considered as methodologically inappropriate.

We find that the effect of multinationality on shareholder value depends on the

existence of intangible assets either related to research and development or on the

existence of intangible assets related to marketing and management skills. Hence, our

findings support the results of Morck and Yeung (1991). Furthermore, our findings tend to

support the view that the effect of mulinationality depends on the potential to realize

economies of scale. The implication is that multinationality is not a value in itself. The

multinational company has to have either intangible assets that can be capitalized abroad

or the potential to realize economies of scale through internationalization in order for

multinationality to lead to value enhancement.

� 2010 Elsevier Ltd. All rights reserved.

* Corresponding author. Tel.: +49 3583612776; fax: +49 3583612734.

E-mail address: eckert@ihi-zittau.de (S. Eckert).

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doi:10.1016/j.ibusrev.2010.04.001

Johanson & Vahlne, 1990, 2009). On the other hand, famous scholars like Dunning (1977), Dunning (1980), Dunning (1998)or Buckley and Casson (1976) argued that multinationality is the consequence of rational decision-making, where firmsoptimize the geographical configuration of their different value chain activities, and define the borders between them andtheir respective markets in the most efficient manner (Hennart, 2009). Hence, according to these rational decision-makingapproaches, multinationality should lead to increases in firm performance. Nevertheless, empirical efforts to clarify therelationship between multinationality and performance have been rather inconclusive up to now leading some scholars toassume that there is no generalizable relationship between multinationality and performance at all (Hennart, 2007).

The solutions to the questions whether multinational companies do perform better than national ones and whichconditions have to be met in order to realize performance increases through firm internationalization are essential fordecision makers in firms. The answers to these questions may provide managers with guidance regarding whether and inwhich way to expand activities beyond the borders of their own home country market. In the meantime, two differentstreams of research have emerged with regard to these questions. One stream of research focuses on accounting-basedmeasures of performance and the other focuses on the relationship between multinationality and value.

The latter has been the subject of a number of empirical studies. However, the results have been quite contradictory up tonow. Whereas some authors find that multinationality increases value (Bodnar, Tang, & Weintrop, 1997; Dastidar, 2009;Gande, Schenzler, & Senbet, 2009), others come to the opposite conclusion, i.e., that multinationality destroys value (Click &Harrison, 2000; Denis, Denis, & Yost, 2002; Kim & Mathur, 2008). And still others find that multinationality leads to increasedvalue if certain conditions are fulfilled and it does not increase value or even reduces value in the absence of these conditions(Markides & Ittner, 1994; Mishra & Gobeli, 1998; Morck & Yeung, 1991). A common element of these studies is that they arealmost all based on samples consisting exclusively of US MNCs.1

In this paper we analyse the impact multinationality has on value for German firms. In regard to the relationship betweenmultinationality and value, companies from the USA may be a very special case due to the size of their home market. Giventhe size of the US market, the multinationality of US companies may indeed be evaluated differently from themultinationality of companies from other countries not quite as large as the USA. In order to gain insight into this, wereplicate the empirical research undertaken by US researchers for German companies.

This contribution is organized as follows. In the following section, we will present a short review of the theoretical andempirical literature concerning the effect of multinationality on value. Based on that, we deduce hypotheses guiding thisresearch. In Section 3, we will describe the methodology employed and the sample on which our analysis is based. In theSection 4, we present the empirical findings and discuss the results. In the final section, we summarize our findings, discussimplications for executives, and briefly outline directions for future research.

2. Theory and literature review

2.1. Theoretical arguments

There is a plurality of theoretical arguments contributing to the explanation of the relationship between corporatemultinationality and shareholder value. Despite this plurality of theoretical arguments, many theorists base their line ofargumentation on the assumption that corporate multinationality implies certain costs that a firm only present on thedomestic market might not incur. Such additional costs of multinationality may on the one hand arise from the liabilities offoreignness and newness (Hymer, 1976; Zaheer, 1995). Firms entering foreign markets may have to convince potentialcustomers to choose them as new suppliers (Johanson & Vahlne, 2009). These efforts cause costs that firms already ‘‘in themarket’’ do not incur (at least not to the same extent). Furthermore, firms operating abroad are confronted with businessenvironments, political and economic systems as well as cultural systems that are different from the ones they are familiarwith. These differences may lead to unexpected costs due to erroneous decisions, which are taken by managers not being(fully) aware of the specifics of the foreign market. Consequently, foreignness and newness can be expected to lead to a valuediscount for multinational companies (MNCs).

However, managers at multinational companies (MNCs) may be able to learn from previous mistakes and may thereforebe able to reduce the liabilities of foreignness and newness with increasing international experience (Zaheer & Mosakowski,1997). Nevertheless, international expansion may nevertheless imply overall increasing costs due to increasing costs ofcoordinating and controlling a geographically dispersed value chain (Lu & Beamish, 2004). Summarizing these difficulties, itseems rather plausible to assume that multinationality might lead to decreases in value.

The fact that companies pursue internationalization despite these costs of expanding abroad is explained by agencytheory, through the separation of ownership and control and the divergence of interests between shareholders and managers(Amihud & Lev, 1981; Denis, Denis, & Sarin, 1997; Morck, Shleifer, & Vishny, 1990). Internationalization decisions may bedriven more by the personal interests of managers for growth, diversification, prestige, or simply higher remuneration, thansound economic motives (Aharoni, 1966).

On the other hand, there are theoretical arguments that support the idea that multinationality leads to valueenhancement. These arguments are based on the presumption that capital markets, factor markets, and/or product marketsare imperfect (Caves, 1971; Hymer, 1976; Kindleberger, 1969).

1 Exceptions known to the authors are Fauver, Houston, and Naranjo (2004), Lee and Makhija (2009), and Lu and Beamish (2004).

S. Eckert et al. / International Business Review 19 (2010) 562–574 563

The line of argumentation for the incomplete capital markets theory (ICMT) is based on the assumption that firms may beable to reduce the revenue fluctuation (and hence the variance of profitability) by geographical diversification (Errunza &Senbet, 1981, 1984; Rugman, 1976). The corresponding effects of a reduction in the variability of profitability on shareholdervalue are however unclear. Multinational firms can be considered to be diversification vehicles for their investors if investingin different countries proves to be difficult and costly for investors due to lack of information on foreign firms, regulationsrestricting transfer of capital across borders, etc. By investing in a multinational firm, investors reap the benefits ofinternational diversification without having to diversify their capital across several countries (Agmon & Lessard, 1977;Jacquillat & Solnik, 1978). In this case multinational firms possess a diversification advantage compared with their investorsand hence, multinationality is viewed by investors as something valuable (Errunza & Senbet, 1981, 1984). However, if capitalmarkets are sufficiently integrated, investors may be able to realize the benefits of international diversification bythemselves. Under these conditions, firm diversification bears no value for investors.

According to location theory, multinational firms are able to combine and exploit the advantages of different locations bygeographically distributing their value chain activities to the most favourable locations (Kogut, 1985). Furthermore, MNCsshould also have a location advantage compared with their national competitors due to a replication of certain value chainactivities in various locations (Allen & Pantzalis, 1996; Dunning, 1998; Doukas, Pantzalis, & Kim, 1999), thus creatingoperational flexibility (Kogut, 1985). This enables them to take advantage of institutional differences or price differencesbetween countries or changes regarding these differences. For example, an MNC with a worldwide network of productionfacilities may shift production capacities in order to take advantage of exchange rate fluctuations. In sum, MNCs shouldpossess an advantage compared with their national competitors due to location advantages. According to this theory,multinationality should lead to value enhancement.

The proponents of the theory of intangible assets (sometimes referred to as ‘‘internalization theory’’, see Morck & Yeung,1991, 1992) argue, that multinationality increases value if the multinational firm is in possession of certain firm-specificintangible assets, which should be internally exploited and capitalized on foreign markets (Buckley & Casson, 1976). Thesefirm-specific intangible assets enable these MNCs to compete successfully against national competitors who are notburdened with liabilities of foreignness (Caves, 1971; Hymer, 1976; Morck & Yeung, 1991). Even if these intangible assetsmay not be a sufficient condition for guaranteeing superior rents (Hennart, 2007), according to the intangible asset theorythey are a necessary one. Therefore, following this theory, without intangible assets multinationality does not lead to animprovement of profitability nor a corresponding increase in value.

2.2. Summary of previous empirical findings

Summarizing empirical research concerning the effect of multinationality on shareholder value proves to be ratherdifficult due to the fact that the concept of value employed in previous studies often proves to be surprisingly vague. In manystudies, the concepts of shareholder value and firm value are treated as equivalent concepts, or it is at least implicitlyassumed that their responses to internationalization are positively correlated (e.g. Mishra & Gobeli, 1998; Morck & Yeung,1991). Hence, in a number of studies, the interpretations of empirical results appear to be dubious, as the authors do not takepotential wealth transfers between stockholders and bondholders induced by internationalization into consideration (e.g.Christophe, 1997; Click & Harrison, 2000; Mishra & Gobeli, 1998). Surprisingly, it took 25 years from the publication ofErrunza and Senbet’s article (1981) to the point where the idea of wealth transfers between stockholders and bondholders asa consequence of internationalization was introduced by Doukas and Kan (2006).

Although unable to deliver valid empirical results regarding firm value, the studies mentioned above can beinterpreted as empirical results regarding shareholder value. A common indicator of value used in these studies as theendogenous variable is Tobin’s Q. Tobin’s Q is defined as the ‘‘market value of the firm divided by the replacement costs ofits tangible assets’’ (Morck & Yeung, 1991, p. 171; Tobin, 1969). However, according to Chung and Pruitt (1994), in thesestudies the replacement costs of the firm’s tangible assets are usually estimated by the book values of total assets.Whereas the firm’s market value is proxied by the market value of equity plus the book value of debt, due to lack ofinformation on the market value of debt. If Tobin’s Q is estimated this way, it cannot account for any changes in themarket value of debt. The focus of Tobin’s Q, operationalized in this way, is restricted to changes in the market value ofequity, i.e., shareholder value.2

The empirical-based discussion on the value of multinationality has been significantly stimulated by the contributionsfrom Errunza and Senbet (1981, 1984). These authors find that multinationality increases value, albeit the effect on valueweakens due to the increasing liberalization of international capital markets. Hence, the authors argue that they have foundempirical evidence on the validity of the incomplete capital market theory (see also Gande et al., 2009). This theory is againtested by Morck and Yeung (1991), who interpret their findings as proof that capital markets are sufficiently integrated, sothat the multinationality of firms is not a value in itself. A number of researchers, such as Christophe (1997), Markides andIttner (1994), and Mishra and Gobeli (1998), claim to have found supporting evidence. However, a closer look at these studiesreveals that their ability to test the validity of the incomplete capital markets theory must be considered as questionable(Eckert & Engelhard, 2008).

2 Berry (2006) uses Tobin’s Q, but consequently interprets her findings as results regarding shareholder value.

S. Eckert et al. / International Business Review 19 (2010) 562–574564

Furthermore, researchers have analysed whether the valuation impact of multinationality depends on the existence offirm-specific intangible assets. Morck and Yeung (1991) can be seen as the pioneering contributors regarding this question.The authors use research and development (R&D) spending as a measure of firm-specific intangible assets related to R&Dand advertising expenditures as a proxy for firm-specific intangible assets related to marketing skills and consumergoodwill. The essence of their empirical results is that the existence of firm-specific intangible assets is crucial ifinternationalization is expected to create value. Christophe (1997), Lu and Beamish (2004), Markides and Oyon (1998), andMishra and Gobeli (1998), who adopt the research design from Morck and Yeung (1991) to some extent, find supportingevidence.

Moreover, Morck and Yeung (1991) analyse whether the potential to combine the location advantages of differentlocations adds value. Specifically, the authors examine whether subsidiaries located in low-cost countries or subsidiarieslocated in tax havens, lead to an enhancement of value. Based on their empirical findings, they come to the followingconclusion:

Our results do not support . . . theories of the advantages of multinationality based either on tax avoidance usingtransfer pricing, tax havens, and so on, or on the use of cheaper labor or other production inputs in low-cost countries(Morck & Yeung, 1991, p. 185).

Markides and Ittner (1994) and Markides and Oyon (1998), who concentrate on the valuation effect of foreignacquisitions, examine the impact of location advantages, however, without being able to deliver significant results. Anumber of event studies, which analyse the effect that the announcement of a foreign acquisition exerts on the share price ofthe acquiring firm, find that acquisitions from developing countries realize significantly higher share price reactions thanacquisitions from developed countries (Doukas, 1995; Doukas & Travlos, 1988; Kiymaz, 2004): a finding that is perfectly inline with the assumption that multinationality increases value due to the fact that MNCs are able to combine the locationadvantages of different locations. This assumption is further supported by Pantzalis (2001) and Berry (2006), who come tothe conclusion that having the ability to combine the advantages of different locations increases value, albeit only if certainpreconditions are met.

Recent research, however, leaves a sceptical impression: Click and Harrison (2000) find a negative valuation impact ofmultinationality on Tobin’s Q in the range of 8.6–17.1%. This finding is supported by the results from Denis et al. (2002) andKim and Mathur (2008). In regard to these findings, Doukas and Kan (2006) argue that internationalization leads to a wealthtransfer from stockholders to bondholders. According to the contingent claims hypotheses, internationalization in generalleads to a decrease in shareholder value, except for those firms whose leverage is very low.

2.3. Hypotheses

Overall, although contradictory to some degree, previous findings seem to indicate that multinationality cannot beconsidered as a value in itself, but that certain preconditions (e.g. in the form of intangible assets) are required in orderfor multinationality to generate value. However, strictly speaking, these conclusions are limited to US MNCs because theresults reported here have been gained by analysing samples consisting exclusively or almost exclusively of UScompanies. Whether they are generalizable beyond the US is a question open to debate, because the category of US MNCsmay be a very special case of the MNC. US MNCs have a very large domestic market. Certain advantages that other firmsmay only realize by going abroad, may be realized by US companies by exploiting the potential of their domestic market(Hennart, 2007). Hence, we can assume that the valuation of multinationality might differ according to the size of thehome market of the multinational firm. Therefore, to analyse the valuation impact of multinationality in the case ofcompanies from a country with a smaller domestic market might contribute to existing knowledge on the relationshipbetween multinationality and shareholder value, and on the factors that influence this relationship. In effect, we mightexpect that in the case of German companies, multinationality (i.e., geographical diversification) may be a much strongerrequirement in order to realize certain economies of scale. With these considerations in mind, the following hypothesescan be formed:

H1. Geographically diversified German companies perform better in terms of shareholder value than geographically non-diversified German companies.

Furthermore, in line with Bodnar et al. (1997), Bodnar, Tang, and Weintrop (2003), Denis et al. (2002) and Fauver,Houston, and Naranjo (2004), among others, we simultaneously take into account the degree of industrial diversification.Despite empirical evidence on a value discount for geographical diversification in the case of US MNCs, we assume that in thecase of German MNCs, multinationality has a positive impact on shareholder value for industrially diversified as well as forindustrially non-diversified companies. Therefore, we propose:

H2. Geographically diversified German companies which are not industrially diversified perform better than Germancompanies that are neither industrially nor geographically diversified.

H3. German companies that are both industrially and geographically diversified perform better than German companiesthat are industrially diversified, but not geographically diversified.

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In research, there is overwhelming empirical evidence that industrial diversification is detrimental to a firm’sshareholders (Berger & Ofek, 1995; Mansi & Reeb, 2002; Rajan, Servaes, & Zingales, 2000). Consequently, we assume that,after controlling for geographical diversification, industrial diversification is detrimental to shareholders:

H4. Geographically non-diversified German companies that are industrially diversified perform worse than geographicallynon-diversified German companies that are not industrially diversified.

H5. Geographically diversified companies from Germany which are industrially diversified perform worse than geogra-phically diversified companies from Germany which are not industrially diversified.

Beyond the comparison of multinational and non-multinational companies, we aim to analyse the effect corporatemultinationality exerts on shareholder value. With regard to the considerations concerning German companies’ strongerrequirement to realize certain economies of scale through internationalization, we propose the following hypothesis:

H6. In the case of German companies, multinationality has a positive impact on shareholder value.

In reference to Christophe (1997), Morck and Yeung (1991), and Mishra and Gobeli (1998), among others, we assume thatintangible assets related to R&D play a crucial role with regard to the relationship between multinationality and shareholdervalue. This leads to the following hypothesis:

H7. The higher the value of intangible assets related to R&D for German companies, the stronger the (positive) impact ofcorporate multinationality on shareholder value.

Furthermore, in line with previous research (Markides & Ittner, 1994; Markides & Oyon, 1998; Morck & Yeung, 1991,1992), we also assume that intangible assets related to marketing and management have a positive impact on shareholdervalue. We therefore hypothesize:

H8. The higher the value of intangible assets related to marketing and management for German companies, the stronger the(positive) impact of corporate multinationality on shareholder value.

In order to capture the effect of other intangible assets we also hypothesize:

H9. The higher the value of other intangible assets for German companies, the stronger the (positive) impact of corporatemultinationality on shareholder value.

Furthermore, we want to shed more light on the idea that the relationship between multinationality and shareholdervalue depends on the precondition that economies of scale can be realized through internationalization (Hennart, 2007). Thisleads to the following hypothesis:

H10. The higher the potential to realize economies of scale for German companies, the stronger the (positive) impact ofcorporate multinationality on shareholder value.

Finally, following the contingent claims hypothesis, we assume that internationalization may lead to a wealth transferfrom stockholders to bondholders. According to Doukas and Kan (2006), we therefore propose the following hypothesis:

H11. The higher a German company is leveraged, the stronger the (negative) impact of corporate multinationality onshareholder value.

3. Sample and methodology

The objective of our study was to analyse the effect corporate multinationality exerts on shareholder value. In line withBerry (2006), Christophe (1997), Click and Harrison (2000), among others, we use Tobin’s Q, but not as a proxy for firm value,rather as a proxy for shareholder value. Keeping with Chung and Pruitt (1994) we obtain estimates for a firm’s Tobin’s Q bythe following formula:

Q ¼market value of equityþmarket value of preferred stockþ book value of debt

book value of equityþ book value of preferred stockþ book value of debt

Furthermore, in order to gain more insight, return on equity (ROE, defined as net income divided by the book value of equity)and return on assets (ROA, defined as earnings before interest and taxes divided by the book value of total assets) were used asadditional proxies for firm performance. In Table 1 an overview of the variables employed in this study is presented.

Multinationality was measured using the ratio of foreign sales to total sales (FSTS) and the ratio of foreign assets to totalassets (FATA). In order to proxy for industrial diversification we classified firm activities according to the Standard IndustrialClassification Code (SIC). Firms were considered as industrially diversified if they reported business activities in more thanone business segment at the two-digit Standard Industrial Classification (SIC) code level.

Our sample consists of listed German corporations. As the period of analysis we selected the time interval stretching from1990 to 2006. Capital market data were obtained from Thomson Financial Datastream, accounting data were retrieved from

S. Eckert et al. / International Business Review 19 (2010) 562–574566

Worldscope. We included all German corporations that were listed in the German stock market for at least 1 year for ourperiod of analysis. Thus, we reached a total number of 1607 corporations.

Given this sample, we first had to neutralize extreme values according to the 3-Sigma-rule. After this procedure we wereleft with a sample of 13,130 firm-year-observations. However, information was not available for all of these 13,130 firm-year-observations for all variables considered. Therefore, the number of valid data varies considerably depending on thespecific analytical operation.

4. Empirical results

4.1. Descriptive statistics

Descriptive statistics for our sample are presented in Table 2. The companies included in our study have an averageTobin’s Q of 2.1 (median value: 1.3). Their return on equity is �16.9% on average (median value: 7.3) and their return onassets is �0.7 on average (median value: 3.3).

The firms in our sample have an average foreign sales ratio of 44.8% (median value: 32.7) and a foreign asset ratio of 16.6%(median value: 0). Most of the firms in our sample come from the manufacturing sector, followed by those operating in thefinancial services-industry. Companies from the telecommunication sector were the smallest subgroup.3

Most companies where information about industrial diversification is given are reporting only operations in one two-digit-SIC category. If we compare, however, between industrially diversified (operations in more than one two-digit-SICcategory) and non-industrially diversified firms (operations in only one two-digit-SIC category), we find that most firms inour sample are industrially diversified.

4.2. The influence of geographical and industrial diversification on shareholder value

4.2.1. Univariate and bivariate analysis

First, we analysed the difference in Tobin’s Q between geographically diversified firms and geographically non-diversifiedfirms. Geographically diversified firms were defined as firms where the foreign asset ratio (FATA) and the foreign sales ratio(FSTS) amounts to more than 10% and geographically non-diversified firms were defined as firms where the foreign assetratio (FATA) and the foreign sales ratio (FSTS) is 10% or less. This classification is consistent with Bodnar et al. (1997), Denis

Table 1

Overview of variables employed in the study.

Variable Abbreviation

Tobin’ s Q TQ

Return on equity ROE

Return on assets ROA

Foreign sales/total sales FSTS

Foreign assets/total assets FATA

Expenditures for Research & Development/Sales RDS

Selling, general & administrative expenses/sales SAS

Other intangible assets TIAA

Capital expenditures/net sales or revenues CETS

Total debt/total assets TDTA

Total assets TA

Earnings before interest and taxes/sales EBITS

Industrial diversification (firm being active in more than one SIC-sector on the 2-digit level) DummyISeg

Table 2

Descriptive statistics.

TQ ROE ROA FATA FSTS TDTA TA RDS SAS TIAA CETS EBITS

N

Valid 9582 10,507 10,755 2942 6184 11,671 11,790 2491 4745 11,610 10,345 11,144

Missing 3548 2623 2375 10,188 6946 1459 1340 10,639 8385 1520 2786 1986

Mean 2.082 �16.913 �.666 16.598 44.771 48.058 6,269,539.159 14.036 52.138 .079 23.460 �.185

Median 1.272 7.250 3.310 .000 32.710 15.960 93,944.500 3.700 16.690 .014 4.140 .051

Percentile

25 1.027 �3.030 .120 .000 .030 1.630 24,557.500 1.270 9.380 .002 1.675 .006

75 1.807 15.870 6.770 27.238 58.808 35.050 450,957.000 8.510 28.600 .090 8.910 .114

3 Details on industry sector distribution can be obtained from the authors by request.

S. Eckert et al. / International Business Review 19 (2010) 562–574 567

et al. (2002) and Fauver et al. (2004). Geographically non-diversified firms have on average a significantly higher Tobin’s Q,regardless of what kind of proxy is used for geographical diversification. However, differences in ROE and ROA are notsignificant (Table 3).

A closer look at the data reveals that the significant difference in Tobin’s Q between geographically diversified firms andgeographically non-diversified firms seems to be influenced by geographically non-diversified firms from the financialservices sector. We therefore excluded these firms in a second step. For the remaining sample, we again tested for differencesbetween geographically diversified firms and geographically non-diversified firms. Even though the differences seem toshrink, they are still there to a certain extent: when employing the foreign asset ratio as a proxy for geographicaldiversification, we find that geographically diversified firms have a significant lower Tobin’s Q compared with geographicallynon-diversified firms. These results are consistent with Denis et al. (2002), Kim and Mathur (2008) and Michel and Shaked(1986), but contrary to Bodnar et al. (2003), Christophe and Pfeiffer (2002) and Fauver et al. (2004). On the other side,however, consistent with Kim and Mathur (2008) these firms exhibit a higher return on assets compared with geographicallynon-diversified firms. If we use the foreign sales ratio as indicator of geographical diversification, differences measured byTobin’s Q, return on equity and return on sales are no longer significant. In sum, hypothesis 1 is not supported by our data.

In line with Bodnar et al. (1997), Denis et al. (2002), and Kim and Mathur (2008) among others, we simultaneously takegeographical and industrial diversification into account. Employing the sample, which excludes the firms from the financialservices sector, we first compare geographically diversified firms and geographically non-diversified firms that areindustrially non-diversified (Table 4). Surprisingly, but in correspondence to the findings of Fauver et al. (2004), thedifferences regarding Tobin’s Q, ROE and ROA are no longer significant regardless of the proxy for geographicaldiversification. The findings are in contradiction to Kim and Mathur (2008), who find that the excess value of geographicallydiversified but industrially non-diversified firms is significantly lower than the excess value of firms which are neithergeographically nor industrially diversified. Hypothesis 2 is not supported.

Table 3

Comparison of geographically diversified and geographically non-diversified firms (firms are geographically diversified if the ratio of foreign assets to total

assets (ratio of foreign sales to total sales) exceeds 10%).

Domestic Multinational Significance of mean

comparison, p-value

FATA FSTS FATA FSTS FATA FSTS

Mean N Mean N Mean N Mean N

Full sample

TQ 2.078 1622 2.135 1760 1.631 1070 1.842 3834 0.000 0.052

ROE �4.616 1671 �2.935 1804 �0.752 1103 �2.202 4021 0.359 0.841

ROA 2.188 1716 2.436 1842 2.749 1121 2.266 4113 0.407 0.698

Sample without firms from the financial services sector

TQ 1.781 1150 1.927 1208 1.653 1022 1.865 3666 0.042 0.734

ROE �9.690 1195 �7.647 1245 �1.708 1048 �2.333 3852 0.120 0.252

ROA 1.200 1232 1.687 1281 2.646 1068 2.263 3946 0.054 0.333

Table 4

Four-group-comparison of geographically diversified and geographically non-diversified firms (firms are geographically diversified if the ratio of foreign

assets to total assets (ratio of foreign sales to total sales) exceeds 10%) and industrially diversified and industrially non-diversified firms (firms are

industrially diversified if they report more than one business segment at the 2-digit Standard Industrial Classification (SIC) code level).

Domestic Multinational Significance of mean

comparison, p-value

FATA FSTS FATA FSTS FATA FSTS

Mean N Mean N Mean N Mean N

Industrially non-diversified

TQ 1.768 487 1.951 497 1.845 281 1.680 1153 0.530 0.114

ROE �4.863 511 �2.419 512 �5.178 285 �3.251 1218 0.959 0.916

ROA 1.231 522 1.971 523 1.390 290 1.759 1244 0.916 0.816

Industrially diversified

TQ 1.680 503 1.811 528 1.500 725 1.824 2265 0.005 0.965

ROE �18.752 524 �16.551 546 �0.453 745 �1.093 2351 0.059 0.084

ROA 0.752 536 1.259 559 3.119 760 2.797 2411 0.023 0.073

Significance of mean comparison, p-value

TQ 0.253 0.003

ROE 0.162 0.445

ROA 0.723 0.112

S. Eckert et al. / International Business Review 19 (2010) 562–574568

Next, we compare between geographically diversified firms and geographically non-diversified firms that are industriallydiversified (Table 4). Employing FATA as the proxy for geographical diversification, we find significant differences withregard to Tobin’s Q as well as with regard to return on equity and return on assets. On the one hand, geographicallydiversified firms exhibit on average a significantly smaller Tobin’s Q (hypothesis 3 is therefore not supported). However, onthe other hand, they exhibit a higher return on equity as well as a higher return on assets. Measuring geographicaldiversification by FSTS, the significance of the difference between the average Tobin’s Q of geographically diversified firmsand geographically non-diversified firms disappears. The latter finding corresponds to the results from Fauver et al. (2004)for their (sub-)sample of German firms. Nevertheless, weak statistical difference concerning return on equity and return onassets remains. Geographically non-diversified firms have a smaller return on equity and a smaller return on assets onaverage compared with geographically diversified firms (Table 4).

Furthermore, we examined the effect industrial diversification exerts on non-geographically diversified firms (Table 4).Firms were classified as ‘‘non-geographically diversified’’ on the basis of their foreign asset ratio. No significant differenceswere found concerning Tobin’s Q, return on equity and ROA. This finding corresponds with the results from Fauver et al.(2004) for German firms, but contradicts Kim and Mathur (2008) who provide empirical evidence that industriallydiversified US domestic companies have lower excess values than US firms that are neither industrially nor geographicallydiversified. Therefore, hypothesis 4 is also not supported.

Additionally, we analysed the effect of industrial diversification, concentrating on geographically diversified firms(Table 4). In this case, significant differences with regard to Tobin’s Q appear, which indicate that industrial diversification isinterpreted as a value destroying activity when accompanied by geographical diversification. Geographically diversifiedfirms that are not industrially diversified, exhibit a higher average Tobin’s Q than geographically diversified firms, that arealso industrially diversified. These findings are consistent with the results from Kim and Mathur (2008) but contradictory tothe findings from Fauver et al. (2004) for their German (sub-)sample. Hypothesis 5 is supported.

To summarize, contrary to Bodnar et al. (2003) and Fauver et al. (2004) but consistent with the findings of Click andHarrison (2000) and Denis et al. (2002), the results indicate that diversification is considered as a liability by the capitalmarket when both modes of diversification are used simultaneously. In the case of industrially non-diversified companies,no significant differences between geographically diversified firms and geographically non-diversified firms can be found.In the case of geographically non-diversified firms, no significant differences between industrially diversified firms andindustrially non-diversified firms appear. However, for industrially diversified firms we are able to provide significantdifferences between geographically diversified firms and geographically non-diversified firms, indicating that employingboth modes of diversification simultaneously may create too much complexity and may lead to an economically relevantincrease in costs of coordination and control, implying a value discount. For geographically diversified firms we findsignificant differences between industrially diversified firms and industrially non-diversified firms, which supports theview that simultaneous industrial and geographical diversification is considered by the capital market as an inefficientstrategy.

4.2.2. Multivariate analysis

In the next section multivariate regression models were tested. As control variables, we considered leverage,profitability, size, industry, capital intensity, and firm-specific intangible assets. Leverage was measured by the ratio oftotal debt to total assets (TDTA). Leverage has been employed as a control variable by Click and Harrison (2000), Dastidar(2009), and Kim and Mathur (2008), among others. In most of these studies a significant negative relationship betweenleverage and shareholder value was found. Similar to Christophe and Pfeiffer (2002), Fauver et al. (2004), and Kim andMathur (2008), as a proxy for size, we used total assets (TA). Concerning the effect of firm size, previous research reportscontradictory results (Christophe, 1997; Click & Harrison, 2000; Kim & Mathur, 2008). In reference to Bodnar et al.(1997), Denis et al. (2002), and Kim and Mathur (2008), we included profitability as a control variable in our regressionmodel measuring profitability by the ratio of EBIT per sales. We took firm industry into account by employing industrydummies (Click & Harrison, 2000; Morck & Yeung, 1991). Additionally, Bodnar et al. (1997), Denis et al. (2002) and Fauveret al. (2004) among others consider firm capital intensity. We interpret capital intensity as a proxy for economies of scale.This control variable is measured by capital expenditures per sales (CETS). Bodnar et al. (1997), Denis et al. (2002) as wellas Kim and Mathur (2008) find a significant positive relationship between capital expenditures per sales and shareholdervalue.

Furthermore, several control variables were included in order to proxy firm-specific intangible assets. To measure firm-specific intangible assets related to research and development, we use the variable research and development per sales(RDS), which was introduced by Morck and Yeung (1991). A significant positive effect of this variable on shareholder valuehas been confirmed by Christophe (1997), Markides and Oyon (1998) and Mishra and Gobeli (1998) among others. Firm-specific intangible assets related to marketing capabilities and consumer goodwill were considered by Bodnar et al. (1997),Christophe and Pfeiffer (2002), Markides and Ittner (1994) among others, but mostly did not prove to be as significant asresearch and development per sales (e.g. Christophe, 1997; Kim & Mathur, 2008). Due to lack of data, we could not useadvertising expenses as a control variable in our model. Instead, we employed the variable ‘‘selling, general andadministrative expenses per sales’’ (SAS) in order to measure firm-specific intangible assets related to marketing capabilitiesas well as to organizational and managerial skills. Other firm-specific intangible assets were assumed to be proxied by theratio of balance sheet-intangible assets to total assets (TIAA).

S. Eckert et al. / International Business Review 19 (2010) 562–574 569

In summary, we tested the following regression model:

Ln Q ¼ Konst:þXn�1

i¼1

g i � BDi þ b1 �MN þ b2 � RDSþ b3 � SASþ b4 � TIAAþ b5 � CETSþ b6 � TDTAþ b7 � TAþ b8 � EBITS

þ b9 � DummyISeg þ e

We estimated ordinary least squares regressions of the log of Tobin’s Q. The results of this model are presented in Table 5(M1 and M2). We find a significant negative relationship between leverage and shareholder value. This result is consistentwith findings from Christophe (1997), Click and Harrison (2000), Denis et al. (2002), among others. Size also appears to besignificantly negative. Furthermore, corresponding with Bodnar et al. (1997), Denis et al. (2002) and Kim and Mathur (2008),profitability and capital intensity exert a significant positive effect on Tobin’s Q.

Moreover, we find a significant positive effect of RDS on Tobin’s Q, which corresponds to findings from Kim and Mathur(2008), Markides and Oyon (1998), and Morck and Yeung (1991). Contrary to most previous studies, the effect of SAS onshareholder value proves to be as strong as the effect of RDS. When employing the foreign asset ratio as proxy forgeographical diversification, SAS has a much higher significance and the regression coefficient is nearly as twice as high asthe regression coefficient of RDS. The regression coefficient of TIAA is neither significant in M1 nor in M2.

Furthermore, the effect of industrial diversification is weakened in the regression model compared with bivariateanalysis. When using FATA as proxy for geographical diversification, industrial diversification still comes out as significantand negative (for corresponding findings: Bodnar et al., 1997; Denis et al., 2002; Kim & Mathur, 2008). However, whengeographical diversification is measured by FSTS, industrial diversification is no longer significant.

Regarding multinationality, we have to concede that its effect on Tobin’s Q depends heavily on the measure employed. Onthe one hand, FSTS as a measure of geographical diversification of sales proves to be insignificant, while on the other hand,FATA – a measure of geographical diversification of assets – comes out significant with a positive sign, supporting hypothesis6. This difference regarding the significance of different proxies for geographical diversification is consistent with thefindings from Christophe and Lee (2005), but contradictory to the results from Click and Harrison (2000), who found an‘‘asset channel of value destruction’’ in the case of geographical diversification of US MNCs. On the grounds of their empiricalfindings they argue that the geographical expansion of sales beyond the borders of the home country can be considered as avalue creating activity if it is not accompanied by geographical diversification of assets, and that the allocation of assetsabroad has to be considered as a value destroying activity, as the investments abroad do not reach the same level of return asdo investments at home. On the contrary, our findings imply that (at least in the case of German companies) geographicalexpansion beyond the borders of the home country has to be accompanied by foreign direct investment in order to lead tovalue increases.

The positive effect of FATA on shareholder value is consistent with the findings from Bodnar et al. (1997) and, on the otherhand, contradictory to the results of Click and Harrison (2000), Denis et al. (2002) and Kim and Mathur (2008), who arguethat geographical diversification leads to a value discount. This result is especially remarkable, as it stands in contradiction tothe findings generated by our univariate and bivariate analysis. Obviously, the relationship between geographicaldiversification and shareholder value seems to be a classical case of Simpson’s paradox (Simpson, 1951). Therefore, ourfindings also provide empirical evidence that univariate as well as bivariate comparisons of the value effect ofmultinationality cannot be considered as valid and may lead to false conclusions (Datta & Puia, 1995; Michel & Shaked,1986).

Additionally, it appears to be remarkable that in the model where we use FSTS as a proxy for geographical diversification,we realize an r2 of 6%. However, when substituting FSTS by FATA, r2 increases to nearly 15%. Obviously, the value relevance ofdifferent measures of multinationality varies depending on the specific home country. In the case of German firms thegeographical distribution of assets seems to be of special importance for explaining Tobin’s Q.

Next, the relationship between geographical diversification and shareholder value will be analysed more closely. Inparticular, we aim to analyse whether the valuation effect of geographical diversification depends on whether themultinational firm possesses firm-specific intangible assets or has the potential to realize certain economies of scale throughbeing multinational. Therefore, similar to Morck and Yeung (1991) we developed another regression model, where the effectof geographical diversification is split into several components. We propose that the regression coefficient of geographicaldiversification b1 can be considered as:

b1 ¼ a0 þ a1 � RDSþ a2 � SASþ a3 � TIAAþ a4 � CETS

Substituting b1 leads to the following regression model:

Ln Q ¼ Konst:þXn�1

i¼1

g i � BDi þ a0 � INT þ a1 � INT � RDSþ a2 � INT � SASþ a3 � INT � TIAAþ a4 � INT � CETSþ b2 � RDS

þ b3 � SASþ b4 � TIAAþ b5 � CETSþ b6 � TdTAþ b7 � TAþ b8 � EBITSþ b9 � DummyISeg þ e

The significance of the regression coefficients of the different components of geographical diversification allows us todraw conclusions on the value relevance of certain preconditions of corporate multinationality. The regression coefficient a0

has to be interpreted as the effect of geographical diversification which is independent of firm-specific intangible assets orcertain potentials for economies of scale. However, this residual factor should be considered as hard to interpret as it may

S. Eckert et al. / International Business Review 19 (2010) 562–574570

Table 5

Multivariate regression.

Independent variables M1 M2 M3 M4 M5 M6

Intercept 3.596e�01 (6.043)*** 4.719e�01 (8.507)*** 3.566e�01 (5.157)*** 3.902e�01 (5.964)*** 3.702e�01 (5.179)*** 4.326e�01 (6.173)***

DummyISeg �8.170e�02 (�2.055)* �7.410e�03 (�0.216) �5.062e�02 (�1.304) �7.548e�03 (�0.224) �4.893e�02 (�1.258) �8.174e�03 (�0.243)

FATA 2.180e�03 (2.836)** – �1.581e�03 (�1.030) – �2.218e�03 (�1.265) –

FSTS – 9.538e�04 (1.511) – 1.996e�03 (2.211)* – 1.014e�03 (0.943)

RDS 2.823e�03 (3.605)*** 2.613e�03 (3.358)*** 2.761e�03 (3.540)*** 1.869e�03 (2.263)* 2.663e�03 (3.365)*** 1.722e�03 (2.074)*

SAS 5.427e�03 (5.688)*** 1.568e�03 (2.833)** 3.159e�03 (2.609)** 4.719e�03 (5.463)*** 3.071e�03 (2.525)* 4.655e�03 (5.389)***

TIAA �2.048e�01 (�1.505) �1.546e�01 (�1.267) 2.309e�01 (1.063) �5.410e�02 (�0.231) 2.615e�01 (1.183) 3.385e�03 (0.014)

CETS 1.106e�02 (4.234)*** 1.860e�03 (3.710)*** 2.804e�04 (0.080) 8.739e�04 (1.705)� 5.912e�04 (0.167) 8.835e�04 (1.724)�

TDTA �5.351e�03 (�4.701)*** �4.011e�03 (�3.972)*** �4.468e�03 (�3.894)*** �4.302e�03 (�4.285)*** �5.728e�03 (�2.827)** �7.491e�03 (�3.490)***

TA �1.522e�09 (�2.119)* �1.999e�09 (�2.750)** �1.811e�09 (�2.567)* �2.719e�09 (�3.747)*** �1.799e�09 (�2.549)* �2.881e�09 (�3.938)***

EBITS 3.327e�01 (5.947)*** 1.635e�01 (3.337)*** 2.451e�01 (3.938)*** 2.239e�01 (4.337)*** 2.430e�01 (3.900)*** 2.239e�01 (4.340)***

FATA:RDS – – 1.908e�04 (2.343)* – 2.123e�04 (2.460)* –

FATA:SAS – – 1.116e�04 (2.422)* – 1.129e�04 (2.449)* –

FATA:TIAA – – �1.197e�02 (�2.580)* – �1.263e�02 (�2.674)** –

FATA:CETS – – 3.652e�04 (3.829)*** – 3.530e�04 (3.649)*** –

FATA:TDTA – – – – 3.479e�05 (0.754) –

FSTS:RDS – – – �4.873e�06 (�0.206) – 3.984e�06 (0.164)

FSTS:SAS – – – �6.490e�05 (�6.959)*** – �6.395e�05 (�6.849)***

FSTS:TIAA – – – �1.760e�03 (�0.432) – �2.845e�03 (�0.690)

FSTS:CETS – – – 1.531e�04 (5.945)*** – 1.531e�04 (5.950)***

FSTS:TDTA – – – – – 6.301e�05 (1.680)

N 716 1314 716 1314 716 1314

Adj. R2 0.1484 0.0597 0.1997 0.09264 0.1992 0.09392

T-values in parentheses.� Significance at the 0.1 level.*** Significance at the 0.001 level.** Significance at the 0.01 level.* Significance at the 0.05 level.

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capture different effects. Morck and Yeung (1991) interpret the non-significance of this regression coefficient in a way thatthis would refute the empirical validity of the incomplete capital markets theory (ICMT). However, we do not agree with thisinterpretation. In order to draw valid conclusions on the empirical validity of the ICMT, it would be necessary to differentiatebetween firms, that are active in countries whose capital markets are highly integrated with the home capital market of themultinational firm, and firms that are active in countries, whose capital markets are insufficiently integrated with thedomestic capital market of the multinational firm. Due to the fact that we did not have access to the necessary data to analysethe value relevance of the ICMT, we have to concede that this topic has to remain unsolved and thus, has to be left as a topicfor future research.

If we use FATA as a measure of geographical diversification (Table 5, M3), the control variables RDS, SAS, TDTA and EBITSremain significant. What is no longer significant is the regression coefficient of multinationality independent of firm-specificintangible assets or certain potentials for economies of scale. Also capital intensity is no longer significant. On the other hand,the regression coefficients of the interaction products of multinationality with RDS, SAS, TIAA and CETS come out significant.Especially notable seems to be the interaction between geographical diversification and capital expenditures per sales,supporting hypothesis 10: the regression coefficient of this component proves to be highly significant, indicating that in thecase of German companies investors value geographical diversification if it offers the chance to realize economies of scale(see also Bodnar et al., 2003). This finding tends to support the hypothesis that the evaluation of the multinationality of thefirm by investors may differ depending on the size of the home country market.

Additionally, the findings of our study confirm results from Markides and Oyon (1998), Mishra and Gobeli (1998) andMorck and Yeung (1991), that multinationality can be considered as value creating if the firm is in charge of firm-specificintangible assets related to research and development or advertising, thus supporting hypotheses 7 and 8. Furthermore, ourfindings may indicate that firm-specific intangible assets regarding certain management skills may also be considered asnecessary preconditions for multinationality to create value. On the whole, by introducing the interaction productsregarding firm-specific intangible assets and potentials for economies of scale, r2 increases to almost 20%.

Corresponding to M1 and M2, r2 decreases remarkably when FATA is substituted by FSTS (Table 5, M3 and M4). This resultfurther supports the presumption that in the case of German firms the geographical distribution of assets seems to bearmuch more value relevance than the geographical distribution of sales. Regarding the control variables employed, noremarkable differences compared to M3 can be found. However, in this regression model, the coefficient of multinationalityindependent of firm-specific intangible assets or certain potentials for economies of scale is positive and significant at the 5%level. Contrary to M3, FSTS–RDS as well as FSTS–TIAA are no longer significant. On the other hand, FSTS–SAS as well as FSTS–CETS are highly significant. Therefore, the positive effect of the potential for economies of scale as a precondition formultinationality is confirmed. The significant negative effect of FSTS–SAS is hard to interpret.

Regardless whether FSTS or FATA is used as a proxy for multinationality, industrial diversification is no longer significant.Therefore, our results are therefore in contrast to the findings of Bodnar et al. (1997), who find a significant negative effect ofindustrial diversification and suggest taking both forms of corporate diversification into account when analysing the effect ofone mode of diversification. Our findings indicate that industrial diversification has no significant effect on shareholdervalue.

Finally, considering the findings from Doukas and Kan (2006), we analyse the effect leverage has on the relationshipbetween multinationality and shareholder value. Doukas and Kan (2006) argue that internationalization is accompanied by awealth transfer from stockholders to creditors. However, if debt as a share of a firm’s total capital is rather low, the wealthtransfer is rather marginal and internationalization can be considered as neutral concerning its impact on the wealth ofstockholders. To test this relationship, we implemented another interaction term into our model, FATA–TDTA and,respectively, FSTS–TDTA. The resulting regression model is

Ln Q ¼ Konst:þXn�1

i¼1

g i � BDi þ a0 � INT þ a1 � INT � RDSþ a2 � INT � SASþ a3 � INT � TIAAþ a4 � INT � CETSþ a5 � INT

� TDTAþ b2 � RDSþ b3 � SASþ b4 � TIAAþ b5 � CETSþ b6 � TdTAþ b7 � TAþ b8 � EBITSþ b9 � DummyISeg þ e

We would expect a5 to come out negative: The higher the leverage, the larger the decrease of Tobin’s Q as a consequenceof internationalization. This relationship is supported by the findings from Bodnar et al. (2003). However, in the case ofGerman companies, the contingent claims hypotheses cannot be supported. As M5 and M6 (Table 5) show, the introductionof this component does not lead to an improvement of r2. Using FATA as a measure of multinationality, the regressioncoefficient of the interaction between multinationality and leverage does not prove to be significant. When FSTS is employed,the regression coefficient is significant, but not with the expected direction. We therefore have to concede that our findingsare not able to support hypothesis 11 and hence, do not confirm the proposals from Doukas and Kan (2006) concerning theimpact of leverage on the relationship between multinationality and shareholder value.

5. Summary, implications and directions for further research

In our sample, which consists of listed German firms during the time span from 1990 to 2006, geographically non-diversified firms have a higher average Tobin’s Q as compared with geographically diversified firms. This relationshipremains stable even after controlling for industrial diversification. However, in our multivariate regression model, the

S. Eckert et al. / International Business Review 19 (2010) 562–574572

impact proves to be quite different. Concerning its impact on shareholder value, multinationality proves to be positive.Obviously, the relationship between multinationality and shareholder value seems to be a classical case of Simpson’sparadox. Hence, bivariate analysis of the effects of multinationality on shareholder value must be considered inappropriate(Datta & Puia, 1995; Michel & Shaked, 1986).

In our multivariate regression model, if geographical diversification is measured by the ratio of foreign assets, we find apositive effect of multinationality on shareholder value. The effect of multinationality on shareholder value depends on theexistence of firm-specific intangible assets especially those related to research and development abilities. Hence, ourfindings support results from Christophe (1997), Markides and Ittner (1994), and Morck and Yeung (1991). Furthermore, ourfindings support the view that the valuation effect of multinationality depends on the potential to realize economies of scale.We found no support for the contingent claims hypothesis of Doukas and Kan (2006).

Therefore, our results clearly indicate that internationalization decisions have significant consequences for shareholdersdue to their impact on shareholder value. A positive impact on shareholder value can only be expected if the firm is in chargeof intangible assets or has the potential to realize economies of scale. Internationalization activities of firms which do notfulfil one of these preconditions can be expected to have no impact on shareholder value or might even be detrimental. Forexecutives, the essential implications of our research are the following:

1. If executives plan to internationalize their company and their ultimate goal is to increase shareholder wealth, they shouldcarefully consider whether their company has any intangible assets that can be capitalized upon abroad, or if there is thechance to realize economies of scale by going abroad. If none of these conditions are met, the firm’s shareholders might bebetter off if the firm refrains from expanding abroad.

2. If the firm possesses certain intangible assets or has the potential to realize economies of scale by going abroad (at least incase of German companies), internationalization seems to be a valuable strategy only if foreign expansion of sales isaccompanied by foreign direct investment activities.

However, these findings have to be validated by further research. Especially, research from MNCs from other countries isnecessary in order to find out more about the home country effect on the relationship between multinationality andshareholder value and the reasons behind it. Furthermore, although seemingly outdated, future research should considertesting the empirical relevance of the incomplete capital markets theory. However, as has been indicated earlier, the‘‘conventional’’ cross-sectional research design may not be appropriate for analysing this question. An event study design, inwhich the stock market effect of FDI activities in countries more or less integrated with the home country market of the MNCis analysed, may be more appropriate.

Acknowledgements

The authors like to thank two IBR reviewers for their helpful comments that contributed significantly to this paper.

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