How Firm Performance Affects Internationalization

Only a few studies have investigated whether a firm's performance has an effect on its internationalization. These studies, focusing on actual firm performance, have suggested a resource-based argument and generally found non-significant results. In this paper, we argue that relative firm performance is critical in determining a firm's internationalization because it influences a firm's attitude toward risk-taking. We apply prospect theory to predict this relationship. Using time-series, cross-sectional analysis of 701 Japanese firms from 1993 to 1998, we uncovered an inverted-U shaped relationship between a firm's relative performance and its degree of internationalization using its historical performance target. As compared to the industry target, relative performance showed a positive impact on a firm's internationalization.