Market Timing and Internationalization Decisions: A Contingency Perspective

• Author: Xiaolin Qian,Nitin Pangarkar,Lin Yuan
• Date: 01 June 2016
• DOI: http://doi.org/10.1111/joms.12181
• Published date: 01 June 2016

Market Timing and Internationalization Decisions:

A Contingency Perspective

Lin Yuan, Xiaolin Qian and Nitin Pangarkar

University of Macau; National University of Singapore

ABSTRACT Does acquisition of low-cost capital through market timing improve the likelihood

of a firm’s internationalization? Under what circumstances will the above relationship be

stronger? These questions are the focus of our study. We integrate the arguments of the

resource-based view and the market timing theory to answer these questions. We constructed

a sample of capital-raising moves and international investments by 905 listed Chinese firms

spanning the 1992–2012 period. Based on random-effects regression analyses, we find that

firms deploying market timing are indeed more likely to internationalize. We also find that

this effect is stronger for initial entries than subsequent expansions in a country.

Keywords: internationalization, internationalization pattern, market timing

INTRODUCTION

In the past 30 years, internationalization has attained tremendous importance as a

growth strategy because of falling barriers to trade and investment and advances in com-

munication and transportation technologies. Scholarly interest in internationalization

strategies and processes has witnessed a similar growth trajectory (Asmussen et al., 2009;

Hitt et al., 2004; Manolova et al., 2010; Prashantham and Dhanaraj, 2010). Prior litera-

ture has recognized that internationalization is a risky strategy because it is associated

with liabilities of newness and foreignness as well as higher transaction, coordination

and management costs (Carpenter et al., 2003; Hitt et al., 1997; Jones and Hill, 1988;

Lu and Beamish, 2004). From a resource-based view (RBV), firms undertake the risky

internationalization because they can use their internal resources and capabilities to

exploit product market imperfections (e.g., in the trading of intermediate goods or intan-

gible assets) existing across different countries and improve their performance (Hitt

et al., 1997). Accordingly, prior literature has studied the impact of both firm-level (e.g.,

Liu et al., 2011; Prashantham and Dhanaraj, 2010) and environmental-level

Address for reprints: Lin Yuan, Faculty of Business Administration, University of Macau, China (linyuan@

umac.mo).

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C2016 John Wiley & Sons Ltd and Society for the Advancement of Management Studies

Journal of Management Studies 53:4 June 2016

doi: 10.1111/joms.12181

antecedents (e.g., Gaur et al., 2014; Wan and Hoskisson, 2003) on the likelihood and

extent of internationalization.

Though they have yielded valuable insights, prior studies on this topic are limited in

one important way. While they have accounted for the inefficiencies in factor and prod-

uct (intermediate as well as final) markets, they have failed to account for the inefficien-

cies in financial markets, possibly because of an (implicit) assumption of traditional

theories of internationalization that financial markets are integrated and informationally

efficient (Bowe et al., 2010). Although a few recent studies have implicitly relaxed this

assumption of efficient markets by suggesting a link between financial resources and

internationalization (Arndt et al., 2012; Forssbæck and Oxelheim, 2008, 2011; Lin

et al., 2009), they are also limited because they primarily focus on the quantum of exist-

ing (or reserve) financial capital (e.g., financial slack; (Lin et al., 2009)), while ignoring

firms’ historical financing strategies and their cost of capital. The finance literature, on

the other hand, has examined whether firms can lower their cost of capital through

adoption of a financing strategy such as market timing (Alti, 2006; Baker and Wurgler,

2002; Bougatef, 2010; Dell’Acqua et al., 2013). But, it hasn’t related the cost of capital

to other elements of a firm’s investment strategy, such as its likelihood of

internationalization.

To bridge the two literatures, we examine the influence of market timing, a widely

used strategy in financial markets, on internationalization decisions. Modern behaviou-

ral finance theory suggests that in inefficient and segmented financial markets, investors’

sentiment can drive the prices of stocks and bonds far away from their fundamental val-

ues, and that this disparity can be significantly large and long-lasting (Baker and

Wurgler, 2007). Therefore, timing becomes an important consideration when a com-

pany needs to raise capital. Market timing implies that managers observe the value

assigned by the market to their debt and equity, and issue stocks or bonds in a ‘hot mar-

ket’ when the investors’ sentiment, and consequently mis-valuation, is extremely high

(Cornelli et al., 2006; Derrien, 2005; Ljungqvist et al., 2006). Firms deploying market

timing strategy are thus able to exploit the financial market imperfections and get access

to low-cost financial resources. As the RBV suggests, these low-cost resources can then

be used to advance a firm’s strategy, by undertaking internationalization for instance.

We go beyond the broad argument about a relationship between market timing and

internationalization to suggest that this relationship may be stronger under specific cir-

cumstances – for initial entry into a country rather than the expansion of an existing

operation, for instance. Empirically, we use data obtained by tracking a sample of Chi-

nese multinational enterprises (MNEs) from 1992 to 2012 to test our hypotheses.

Our study makes several contributions to the international business (IB) literature.

First, to our knowledge, our study is a pioneering attempt to examine the alignment

between financing strategy and internationalization decisions, specifically addressing

how firms can exploit inefficiencies in the financial markets to facilitate their internation-

alization strategy. Secondly, in addition to the greater confidence that our longitudinal

data should inspire in the robustness of our findings, our approach is also more complete

in the sense that it looks at both the acquisition (through market timing) as well as

deployment (through internationalization) of resources. The finance and international

strategy literatures, in contrast, have either looked at acquisition of capital or

498 L. Yuan et al.

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C2016 John Wiley & Sons Ltd and Society for the Advancement of Management Studies