Causality Between International Expansion & Investment in Intangibles: Implications for Financial Performance & Firm Survival

Abstract

This paper reports a statistical study of the temporal causal relationships between expansion of a firm's multinational structure and the firm's growth in spending of R & D and advertising. We find that firms increase R & D expenditures after expanding their multinational structure, but not vice versa. We also find that past growth of R & D spending increases a firm's rate of return. Consistent with the above observations, past growth in R & D spending strongly increases the likelihood that a firm will survive during the study period, while past international expansion has a weak positive effect on survival. The results are consistent with three arguments. First, because international expansion is often risky with uncertain results, increased spending on international expansion. Second, attracted by opportunities to expand the scale and scope of its operation, a firm increases its investment in intangibles after it increases its international presence. third, nonetheless, investment in intangibles is the driving force of improved financial performance, meaning that multinational firms will only be able to garner better financial performance if they increase their spending on intangibles once increasing their international presence. The data include 239 public American corporations operating during the 1980s.