Strategic opportunity and economic performance in multinational enterprises: The role and effects of information and communication technology

Journal of International Management
11 (2005) 293 – 310
Strategic opportunity and economic performance in
multinational enterprises: The role and effects of
information and communication technology
Torben Juul Andersen*, Nicolai Juul Foss
Department of Management, Politics, and Philosophy, Copenhagen Business School, Blaagaardsgade 23B,
2200 Copenhagen N, Denmark
Available online 12 May 2005
Abstract
Recent work on multinational enterprises (MNEs) argues that diversity in terms of the markets
they serve and the environments they acquire inputs from provides strategic opportunity unavailable
to purely domestic firms. However, MNEs are also exposed to higher levels of complexity and
uncertainty due to the presence in different locations and confront associated needs to integrate and
coordinate activities. This paper suggests that the attendant cost–benefit tradeoff can be influenced by
computer-mediated communication. Based on a sample of 88 organizations in the computer products
industries, we find that multinationality in itself does not guarantee a higher level of strategic
opportunity. Instead, use of information technology to facilitate communication among managers
across functional and geographical boundaries enhances coordination of multinational activities in
the development of strategic opportunity, which in turn is associated with superior performance.
D 2005 Elsevier Inc. All rights reserved.
Keywords: Computer-mediated communication; Strategic opportunity; Knowledge management
1. Introduction
The economic performance of multinational enterprises (MNEs) has been subject to
intense scrutiny and debate (e.g., Click and Harrison, 2000; Annavarjula and Beldona,
* Corresponding author. Tel.: +45 38153630.
E-mail addresses: tja.lpf@cbs.dk (T.J. Andersen), njf.lpf@cbs.dk (N.J. Foss).
1075-4253/$ - see front matter D 2005 Elsevier Inc. All rights reserved.
doi:10.1016/j.intman.2005.03.008

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2000; Contractor et al., 2003). However, the performance effects of multinationality
remain in dispute, and, taken together, existing findings are inconclusive. Many theoretical
arguments have been forwarded to suggest that multinationality can have positive
performance effects. An important idea in recent work on the bdifferentiated MNEQ posits
that diversity in terms of the national markets they operate in and acquire inputs from
provides MNEs with business opportunities that are not available to purely domestic firms
(Hedlund, 1986; Prahalad and Doz, 1987; Kogut and Zander, 1993; Bartlett and Ghoshal,
1998; Foss and Pedersen, 2002; Mudambi, 2002). However, managing a multinational
structure increases the level of complexity and uncertainty faced by MNE management
due to the presence in different market environments (e.g., Rosenzweig and Singh, 1991;
Zaheer, 1995). Moreover, various organizational costs are likely to be higher in the MNE
structure than in a purely domestic firm. For example, because cultural and institutional
diversities increase the cost of acquiring and processing information (Casson, 2000) and
impose agency costs across diverse operating entities (Benito et al., 2005).
While the international business literature recognizes that multinationality imposes
distinct benefits and costs on the organization, there is arguably less theoretical and
empirical understanding about how MNEs can influence the attendant tradeoff so as to
influence performance to their advantage. It is argued here that MNEs can use information
and communication technology (ICT) in their knowledge management processes to
influence this tradeoff. In particular, we argue that ICT may assist in generating benefits in
the form of strategic opportunity, that is, bopportunities for positive NPV undertakingsQ
(Denrell et al., 2003) and in coordinating the development of these opportunities across
the MNE. For a number of reasons, e.g., organizational path-dependencies and differential
ICT capabilities, MNEs are not equally good at managing the tradeoff between costs and
benefits of multinationality to their advantage. This may help explain the rather
inconclusive findings on the performance effects of multinationality.
This paper contributes to the body of work that has dealt with the performance of multi-
nationality building on recent ideas on knowledge management in the bdifferentiated
MNE.Q The unifying theme is the possible moderating effects of information technology in
the generation of strategic opportunity in the MNE. We analyze the relationships between
multinationality, computer-mediated communication, strategic opportunity, and economic
performance in a sample of 88 organizations operating in the computer products industries.
Our overall finding is that multinationality does not guarantee the ability to generate
strategic opportunity nor enhance performance per se. However, multinationality in
conjunction with the internal use of ICT among managers in the organization seems to
facilitate the development of strategic opportunity, which in turn is associated with higher
economic performance.
2. The performance of multinational enterprises
The relationship between multinationality and performance has been subjected to
theoretical considerations as well as empirical studies in a comprehensive literature.
Explanations for positive performance effects of multinationality include exploitation of
firm-specific assets (Caves, 1971, 1982; Vernon, 1971), internalization of geographic

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295
advantages (e.g., Rugman, 1981), scale and scope economies (Porter, 1985; Hamel and
Prahalad, 1985), diversification and earnings stability (e.g., Madura and Whyte, 1990),
operational flexibilities (Kogut and Kulatilaka, 1994), etc. Arguments for performance
disadvantages of multinationality include liabilities of foreignness (e.g., Hymer, 1976),
information processing and coordination costs (e.g., Jones and Hill, 1989), empire
building (Jensen, 1986; Stulz, 1990), business risk (Reeb et al., 1998; Delios and Henisz,
2000), disproportionate asset investment (Click and Harrison, 2000), etc. Other recent
contributions have tried to reconcile the mixed findings by proposing curvilinear
performance relationships (Hitt et al., 1997; Lu and Beamish, 2001). However, the
performance effects of multinationality remain unclear and offer an interesting area for
further exploration.
2.1. Benefits and costs of multinationality
Performance effects of multinationality may rest on resource factors, such as, expanded
market reach (Kogut, 1985; Kobrin, 1991), arbitrage from cross-border transactions
(Teece, 1981), and wider access to financial markets (e.g., Yip, 1995; Govingarajan and
Gupta, 2001). In addition, MNEs can use their multinational reach to tap into local
knowledge reservoirs, absorb it and transfer it among MNE units. The MNE may be able
to generate more and superior bnew combinationsQ (Schumpeter, 1949) of knowledge
elements (Grant, 1996) and otherwise build organizational learning from their access to
diverse local knowledge (Kogut and Zander, 1993; Argote, 1999). If the organization
controls and thereby has direct access to knowledge-based intangible assets in different
national environments, the absorption and exchange of potentially useful insights should
be easier (Cohen and Levinthal, 1990; Kogut and Zander, 1992). Furthermore, organiza-
tional learning and the building of new knowledge assets can be facilitated by the presence
of MNE specific communication channels (Kogut and Zander, 1993).
All of this amounts to saying that MNEs may be able to create strategic opportunity
that is not available to domestic firms. In fact, the set of business opportunities that MNEs
confront will be larger than that available to domestic firms, since MNE subsidiaries can
replicate the business opportunities created by domestic firms. This may be taken to imply
that MNEs (on average) can demonstrate superior economic performance relative to
domestic firms. However, to conclude so would be a non sequitur. First, generating
strategic opportunity is not the same as exploiting it, which in turn is not the same as
realizing superior performance (Teece, 1986). Second, there are distinct costs of
multinationality that may offset (or more than offset) the benefits. Thus, the unfamiliarity
with foreign ways of thinking and doing things (Hymer, 1976), the cost of acquiring
knowledge in unfamiliar market environments (Johanson and Vahlne, 1990), and higher
coordination costs in diverse international settings (Jones and Hill, 1989) argue for adverse
economic effects of the multinational structure. In other words, MNEs face important
tradeoffs caused by the distinct costs and benefits of multinationality.
Because firms differ in their knowledge management capabilities, the impact of these
multinational costs and benefits may also vary. The ability to create new knowledge,
innovate, and generate business opportunities as well as effectively coordinate the related
organizational activities may be facilitated by means of specific communication enhancing

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use of information technology (Zuboff, 1988; Galbraith, 1994). In principle, both the cost
and the benefit side of the tradeoff may be influenced but there are a number of reasons
why MNEs may not be equally effective in managing the tradeoff to their advantage,
notably, organizational path-dependencies and differential ICT capabilities. This may help
explain inconclusive findings with respect to the performance of multinationality, because
it implies that some firms are better than others at mobilizing the distinct benefits and
curbing the costs implied by the multinational structure. The next section will discuss these
issues further.
3. MNE knowledge management and strategic opportunity
3.1. The knowledge-based view of the MNE
Recent work on the MNE argues that a main advantage of the MNE, and perhaps the
rationale for its existence, is that the diverse knowledge sources of the MNE can be
managed so as to generate innovations and thereby create strategic opportunity for the
organization (e.g., Inkpen and Dinur, 1998; Foss and Pedersen, 2002; Desouza and
Evaristo, 2003). This knowledge-based perspective builds on a tradition of analyzing
multinational activities in the context of organizational learning (Johanson and Vahlne,
1990; Andersen, 1993; Barkema et al., 1996; Grant, 1996). However, it extends the
learning perspective by linking it to the MNE’s ability to make alternative strategic actions
available to the organization in a changing global environment. The knowledge-based
perspective can explain how an MNE can access diverse insights controlled within a
global organizational structure and recombine these into new product and process
innovations. Huber (1991) defined such learning as information processing that enables
the organization to act in new ways and Nonaka (1994) described it as a dynamic process
of knowledge creation. In effect, this constitutes an ability to create new business
opportunities that allow the organization to do things differently and accomplish things it
was unable to do previously. Hence, multinationality may provide an organization with a
richer endowment of diverse competencies that enhance the organization’s ability to
innovate (Allee, 1997) and thereby create strategic opportunity. In this context, the
important dimension of the multinationality construct is the physical presence in overseas
markets outside the home country. Other operational multinationality constructs typically
reflect the organization’s cross-border involvement, e.g., in terms of international sales and
investment. However, this does not necessarily correspond to an overseas presence and,
therefore, may have different performance implications.
3.2. Determinants of strategic opportunity
Denrell et al. (2003) relate the concept of bstrategic opportunityQ to bopportunities for
positive NPV undertakings.Q Evidently, this covers a broad spectrum ranging from entirely
new process technologies and radical product innovations to modest organizational
adjustments and incremental process adaptations. Hence, we focus on a subset of positive
NPV undertakings comprising product and process innovations that constitute concrete

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297
business opportunities with an economic value potential for the organization. However, it
is not evident that strategic opportunity automatically leads to higher economic
performance, that is, the positive relationship between innovation and performance is
often an underlying assumption that needs verification (Damanpour, 1991). One can
ponder over the serendipitous process associated with the development of strategic
opportunity, which is likely to be influenced by elements of creative effort, as well as pure
luck and various organizational characteristics, such as the presence of complementary
resources needed to commercialize innovations (Denrell et al., 2003). Per definition, luck
cannot be directly influenced, and many organizational characteristics are fixed, at least in
the short run. It is therefore pertinent to look at how creative effort may influence strategic
opportunity.
It is argued that a key to multinational performance lies in an ability to exploit local
opportunities through effective integration of multinational activities (Prahalad and Doz,
1987; Bartlett and Ghoshal, 1998). The ability to identify and respond to local market
opportunities is linked to autonomous organizational entities acting within a decentralized
decision structure, while effective execution of multinational activities relies on opera-
tional integration and coordination of strategic decisions in a central planning process
(Prahalad and Doz, 1987). Information technology may be used as a tool to facilitate the
dual objectives of developing responsive opportunities across different national markets
and integrating them effectively across multinational entities. Hence, Galbraith (1994)
suggests that local opportunities may be turned into global ones through the use of ICT to
facilitate geographic and functional coordination of organizational activities. Through
these processes, explicit as well as tacit knowledge, e.g., about diverse market insights,
functional expertise, best unit practices, etc., can be exchanged and thereby assist in
mobilizing new business opportunities that require the concerted efforts of several MNE
units, e.g., bsystemic innovationQ (Teece, 1986). Other scholars tend to agree suggesting
that decision processes in firms organized around autonomous entities can be induced by
communication enhancing information technology and lead to innovative behavior and
superior performance outcomes (Andersen and Segars, 2001; Andersen, 2001). Hence, the
use of ICT to facilitate internal communication can support learning processes and
innovation and thereby increase the organization’s ability to respond to changing
conditions (Zuboff, 1988; Huber, 1990).
3.3. ICT as instruments of knowledge creation and coordination
The exchange of tacit knowledge is not necessarily confined to face-to-face social
interaction as may be the case in the discourse underlying a strategic planning process
(Lord and Ranft, 2000) but can be facilitated electronically as well (Damsgaard and
Scheepers, 2001). From an information processing perspective, the higher uncertainty and
complexity associated with multinationality increase the amount of information decision
makers must process to monitor environmental changes and coordinate tasks between
subunits (Galbraith, 1974; Tushman and Nadler, 1978). However, the use of computerized
information systems can accommodate these communication needs and support the
exchange of unstructured and non-quantifiable soft information (Galbraith, 1977, 1994;
Tushman and Nadler, 1978). In the dynamic environments surrounding multinational

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organizations, non-routine responses imposed by uncertain task environments call for
more autonomous actions coordinated through mutual adjustment processes (e.g., Perrow,
1966; Thompson, 1966; Mintzberg, 1983). Hence, the central planning as well as
autonomous actions are found to be instrumental for achieving superior corporate
performance (Andersen, 2000). Computer-based information systems can accommodate
the associated exchange of soft and unstructured information and facilitate the required
informal communication among managers in multinational subunits and thereby reduce
coordination cost (Fulk and DeSanctis, 1995; Joyce et al., 1997).
More generally, ICT can support knowledge creation and innovative behavior by
assisting the integration of diverse insights in the MNE across time and space (e.g.,
Malone and Rockart, 1993). Moreover, ICT can reduce information processing and
coordination cost and thereby facilitate the efficient development of new business
opportunities (Zuboff, 1988; Fulk and DeSanctis, 1995; Kettinger and Grover, 1997).
Hence, use of ICT as enabler of computer-mediated communication among managers in
multinational organizations has the capacity to facilitate coordination of activities across
functional specializations and international market insights in a cost effective manner and
thereby increase the economic value associated with the development of strategic
opportunity. Based on these theoretical considerations, we proceed to formulate associated
hypotheses.
4. Hypotheses
Multinationality can represent more diverse knowledge, insights, skills, and capabilities
among managers located in different national environments (Kogut and Zander, 1993;
Grant, 1996). A more diverse and rich knowledge base within the MNE increases the
likelihood that the organization can recombine it to create new knowledge, innovate, and
develop strategic opportunity. Hence,
Hypothesis 1. Multinationality is positively associated with strategic opportunity.
Use of ICT can enable computer-mediated communication among managers located
across the multinational organization and enhance the internal exchange of rich and tacit
information. Such ICT enhanced communication can facilitate the knowledge creation and
innovation processes of the multinational enterprise (Huber, 1990; Galbraith, 1994;
Damsgaard and Scheepers, 2001). This is essential to the creation of new business
opportunities and argues for the following hypothesis.
Hypothesis 2. A higher level of computer-mediated communication has a positive
moderating effect on the association between multinationality and strategic opportunity.
The presence of strategic opportunity extends the number of alternative actions
available to the multinational enterprise and thereby improves its responsiveness under
changing environmental conditions. An improved ability to pursue alternative strategic
actions in a complex and dynamic global environment increases the likelihood that
outcomes will be favorable and hence can lead to higher economic performance.
Therefore,

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299
Fig. 1. A model of strategic opportunity and economic performance in the MNE.
Hypothesis 3. A higher level of strategic opportunity is positively associated with
economic performance.
The proposed model of strategic opportunity and performance effects in the multina-
tional enterprise is shown in Fig. 1. Multinationality can be defined in terms of
international sales and overseas presence and do not necessarily constitute overlapping
indicators. The model suggests that these multinationality constructs might have a direct
positive effect on the creation of strategic opportunity (Hypothesis 1) although the effect of
a diverse overseas presence is more in line with the knowledge management logic. The
integration–responsiveness framework developed in international management suggests
that emphasis on integrative planning and decision autonomy is needed to support
effective creation of strategic opportunity in the multinational enterprise (Prahalad and
Doz, 1987; Bartlett and Ghoshal, 1998). However, integrative planning in a complex
global setting may be associated with incremental information processing cost and
decision autonomy across multinational entities may lead to agency conflicts. These
potentially adverse effects somehow need to be countervailed. The model suggests that
computer-mediated communication constitutes such a countervailing factor that can
positively moderate the ability to create strategic opportunity in the MNE (Hypothesis 2).
In turn, the ability to create strategic opportunity may lead to higher economic
performance (Hypothesis 3). In the following, we present an empirical study devised to
test the hypothesized relationships.
5. Methodology
5.1. Data
A sample of business entities from the computer products industries, comprising
electronic computers, storage devises, terminals, calculators, measuring, and analytical
instruments, was used to test the hypotheses. These organizations operate in highly
complex and dynamic global markets with a pronounced need for innovative behavior

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(Morrison and Roth, 1992) and are therefore particularly relevant for this study. A search
in the Compustat database identified 178 independent US-based business entities
comprising single business firms and corporate business units in the identified industries.
The model constructs and related control variables were measured on the basis of
responses to a questionnaire mailed to the executives with responsibility for the market-
related functions in the identified organizations.
Useable questionnaires were returned from 88 of the 178 solicited organizations,
which represents a response rate of 49.4%. The sample was tested for non-response biases
and no significant differences were found in total assets, net sales, sales growth, return on
assets, return on equity, or profit margin between responding entities and non-
respondents. Similar bias tests were performed between single business firms and
corporate business units in the sample. The self-reported measures on profitability and
sales growth were validated by comparison to corporate data for return on assets and
annual growth in turnover from Compustat. The analysis revealed correlation coefficients
between the subjective and archival data ranging from 0.44 to 0.57 across organizations
within the sampled four-digit SIC industries, which was considered satisfactory (Dess and
Robinson, 1984). The reliability of the primary respondents was tested randomly among
the first two-thirds of the responding executives. Hence, secondary responses were
obtained from several managers reporting to the executive in 9 of the organizations,
corresponding to approximately 10% of the sample. The comparison between primary
and secondary respondents in this sub-sample indicated an average inter-rater reliability
of 0.70, which was deemed satisfactory (Rosenthal and Rosnow, 1991). The internal
consistency of the variables was validated in factor analysis performed on all item
responses, which supported the existence of distinct constructs. Chronbach’s alphas on
model constructs and control variables were calculated as 0.79 (computer-mediated
communication), 0.69 (strategic opportunity), 0.85 (economic performance), 0.83
(integrative planning), and 0.72 (decision autonomy), which was considered satisfactory
(Nunnally and Bernstein, 1994).
5.2. Measures
Different aspects of international business expansion may have different effects on
performance outcomes (Annavarjula and Beldona, 2000) and, therefore, Multinationality
was measured in two ways to reflect international engagement and overseas establishment,
respectively. Hence, Multinationality (A) was reflected in the organization’s international
sales in relation to its total sales. This is comparable to other operational measures like
overseas subsidiaries as a percentage of all subsidiaries, foreign assets as a percentage of
total assets, percentage of international shareholders, etc. (Sullivan, 1994; Annavarjula and
Beldona, 2000). Alternatively, Multinationality (B) was reflected in the organization’s
physical presence in overseas markets captured by a dichotomous variable indicating
whether or not the organization has operating entities located outside the home country.
This measure implies that the organization has made some foreign direct investment to
establish an overseas presence and thereby controls economic assets, human resources,
and business processes in foreign market environments (e.g., Teece, 1981). The latter
multinationality construct is likely to capture potential diversities in tangible and

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301
intangible assets that are accessible within the MNE. Both measures of multinationality
were determined on the basis of information from Compustat.
Computer-mediated communication indicates the extent to which managers in different
organizational entities use information technology to communicate through electronic
networks (Andersen, 2001). Integration through central planning as well as responsiveness
through autonomous decision making supposedly affect multinational performance
(Prahalad and Doz, 1987; Bartlett and Ghoshal, 1998) and, therefore, should be included
as control variables. Integrative planning indicates the organization’s emphasis on
comprehensive rational strategy analysis (Schendel and Hofer, 1979) measured on the
basis of previous items (Boyd and Reuning-Elliott, 1998). Decision autonomy indicates
the extent to which lower level managers in corporate entities can take actions of potential
strategic importance without central management approval (Miller, 1987; Roth and
Morrison, 1992). Strategic opportunity indicates the organization’s ability to innovate and
generate new business opportunities. It was measured here as the organization’s propensity
to generate ideas, do things differently, change, and turn ideas into actual business
opportunities (Price, 1972; Damanpour, 1991). Economic performance was measured by
self-assessed indicators of the organization’s profitability and sales growth compared to
close competitors (Dess and Robinson, 1984). Use of self-assessed performance indicators
compared to the firm’s close competitors circumvents potential problems with systematic
differences in performance across the four-digit SIC industry segments (Rumelt, 1991).
All items on the questionnaire were indicated on five-point Likert scales and aggregated
into measures of model constructs and control variables (see Appendix A).
Organizational size and the associated bslack resourcesQ may influence the ability to
make commitments in the development of strategic opportunity (Aldrich, 1999). Hence,
the natural logarithm of total assets was included as control variable. Similarly, an
organization’s commitments to fixed asset investment could restrain engagements in
innovative activities. Hence, the ratio of fixed assets to total equity was also included as
control variable. These control variables were determined on the basis of information
provided from Compustat. Table 1 provides descriptive statistics of all the variables
included in the subsequent analysis.
5.3. Analysis
The hypotheses were tested through hierarchical multiple regression analyses and two-
stage least square regressions. Hypotheses 1 and 2 were tested by the statistical
significance of regression coefficients with strategic opportunity as the dependent variable
and multinationality and its interaction term with computer-mediated communication as
independent variable (Aiken and West, 1991). It is argued that the strategic planning
process can support communication of rich information and tacit knowledge in
multinational organizations (Lord and Ranft, 2000), which then constitutes an alternative
communication platform. Hence, the interaction term between integrative planning and
mutinationality was included to control for this potential effect. We also included the
interaction term between decision autonomy and multinationality in the regression. The
inclusion of both interaction terms controls for the potential adverse effects caused by
incremental information processing costs in the multinational planning process and agency

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302
T
.J.
Andersen,
Table 1
N.J.
Descriptive statistics and correlation coefficients (n = 88)
Foss
Mean
S.D.
1
2
3
4
5
6
7
8
/
1
Ln (assets)
4.13
1.990
–
–
–
–
–
–
–
–
Journal
2
Fixed-asset investment
0.15
0.537
0.098
–
–
–
–
–
–
–
3
Integrative planning
17.23
4.385
À0.031
À0.112
–
–
–
–
–
–
4
Decisions autonomy
13.92
4.046
0.341***
0.011
0.155
–
–
–
–
–
of
5
Computer-mediated
12.80
2.290
0.208
À0.066
0.154
0.342***
–
–
–
–
Internat
communication
6
Multinationality
9.89
15.605
0.263**
À0.020
À0.023
0.049
0.090
–
–
–
ional
(international sales)
7
Multinationality
0.18
0.388
0.084
0.024
À0.012
0.229**
0.016
0.191*
–
–
Managem
(overseas presence)
8
Strategic opportunity
10.88
1.794
0.204*
À0.116
0.355***
0.362***
0.193*
À0.017
0.114
–
9
Economic performance
7.26
2.484
0.192*
0.025
0.405***
0.386***
0.250**
À0.075
0.093
0.480***
ent
* p b 0.10.
1
1
** p b 0.05.
(2005)
*** p b 0.01.
293–310

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Document Outline

• Strategic opportunity and economic performance in multinational enterprises: The role and effects of information and communication technology
  • Introduction
  • The performance of multinational enterprises
    • Benefits and costs of multinationality
  • MNE knowledge management and strategic opportunity
    • The knowledge-based view of the MNE
    • Determinants of strategic opportunity
    • ICT as instruments of knowledge creation and coordination
  • Hypotheses
  • Methodology
    • Data
    • Measures
    • Analysis
  • Results
  • Concluding discussion
    • Main findings
    • Implications for understanding variation in MNE performance
  • Acknowledgement
  • Items used to measure the model constructs
    • Computer-mediated communication
    • Integrative planning
    • Decision autonomy
    • Strategic opportunity
    • Economic performance
  • References

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