The Relationship Between Home Market Performance and Internationalization Decisions: Evidence From German Insurance Groups

• DOI: http://doi.org/10.1111/rmir.12043
• Published date: 01 March 2016
• Date: 01 March 2016
• Author: Gerrit Gößmann,Muhammed Altuntas

Risk Management and Insurance Review

C

Risk Management and Insurance Review, 2016, Vol.19, No. 1, 37-71

DOI: 10.1111/rmir.12043

THE RELATIONSHIP BETWEEN HOME MARKET

PERFORMANCE AND INTERNATIONALIZATION DECISIONS:

EVIDENCE FROM GERMAN INSURANCE GROUPS

Muhammed Altuntas

Gerrit G¨

oßmann

ABSTRACT

This study investigates the relationship between home market performance

and the choice of foreign market entry mode using survey data and financial

statement data for German insurance groups with property–liability business

from 1999 to 2011. We develop a dynamic resource-based perspective and ar-

gue that strategic transformation is a major motive driving the decisions of

insurance groups to internationalize their businesses. Additionally, the more

rapid the strategic transformation, the more intense is the choice of market

entry mode. Furthermore, our findings corroborate the notion that interna-

tionalization has a positive effect on home market performance when insurance

groups areable to decrease home market dependence by extending the degree of

internationalization.

INTRODUCTION

A firm’s decision to expand operations to international markets has far-reaching impli-

cations that can shape operations for many years and impact future profitability and

growth opportunities (Berry-St¨

olzle and Altuntas, 2010). Recognizing the importance

of internationalization, researchers have extensively examined firm-specific, industry,

and environmental factors driving international expansion and performance. Focusing

on the performance implications of internationalization, firm-specific factors have been

heavily explored to explain performance differences across manufacturing firms (e.g.,

B¨

uhner, 1987; Daniels and Bracker, 1989; Grant et al., 1988; Hitt et al. 1997; Ruigrok

and Wagner, 2003; Tallman and Li, 1996). On the one hand, researchers formulate that

theories developed to explain the internationalization of manufacturing firms are appli-

cable to service firms (Boddewyn et al., 1986; Katrishen and Scordis, 1998). On the other

Muhammed Altuntas is at the Department of Risk Management and Insurance, the

University of Cologne; e-mail: Muhammed.Altuntas@uni-koeln.de. Gerrit G¨

oßmann is at

the Department of Risk Management and Insurance, the University of Cologne; e-mail:

goessmann.unikoeln@gmail.com. The authors would like to thank Thomas R. Berry-St¨

olzle,

Dieter Farny, Andre P. Liebenberg, Heinrich R. Schradin, and Mary A. Weiss for helpful com-

ments and suggestions on a previous version of this article. All remaining errors are our own.

This article was subject to double-blind peer review.

37

38 RISK MANAGEMENT AND INSURANCE REVIEW

hand, researchers claimed that service firms’ internationalization should be analyzed

separately because of the inseparability of production and consumption of the product

or service that drives them to expand internationally in a distinct manner (Capar and

Kotabe, 2003; Contractor et al., 2003). Consequently,academic research has investigated

internationalization in the insurance and reinsurance industry (Ma and Pope, 2003; Cole

et al., 2007; Outreville, 2008). For example, Cole et al. (2007) investigate the factors that

influence reinsurers’ decisions to assume reinsurance from foreign countries, whereas

Ma and Pope (2003) examine the determinants of international insurers’ participation

in foreign markets. In addition, academic research related to the relationship between

internationalization and corporate performance generates a foundation from which the

internationalization debate in the insurance industry can emerge (e.g., Ma and Elango,

2008; Berry-St¨

olzle, Hoyt, and Wende, 2010). However, the corporate focus on interna-

tionalization fails to test the three following empirical questions:

1. How does home market performance affect the decision of internationalization?

2. How does home market performance influence the choice of foreign market entry

mode?

3. How does internationalization affect long-term profitability in the home market?

In the tradition of Porter (1990), internationalization is the result of competitive advan-

tages that produce greater profitability in the home market. This greater profitability

provides motivation to apply the same competencies in international markets (Porter,

1990). Contradicting notions from the dynamic resource-based view suggest that firms

in initially disadvantaged positions will aggressively try to close the performance gap

through diversification strategies (Cockburn et al., 2000). However, to our knowledge,

no study has investigated whether profitability in the home market is linked with inter-

nationalization in the insurance industry, leading to our first research question.

Moreover,although considerable attention has been devoted to market entry modes (Pan

and Tse, 2000), to our knowledge, there exists no study that has investigated whether

performance in the home market influences the choice of foreign market entry mode,

leading to our second research question.

For the third question, there is long-standing empirical evidence that an international

firm in a global industry has advantages in its national markets (e.g., Vernon, 1971;

Dunning, 1973; Rugman, 1979; Kim et al., 1989). However, the only study that provides

empirical insights on the effects of firms’ international expansions on their home mar-

ket performance was done by Mitchell et al. (1993), which indicated that international

expansion will be beneficial in transition industries,1and suggested, “Incumbents that

adapt to the changing environment by increasing their global presence, particularly

firms with some prior international experience and a strong base in the home market,

will often survive and gain [market] share” (Mitchell et al., 1993, p. 666). However, to

our knowledge, there is no study that has investigated how internationalization affects

home market performance.

1“Transition industries are those in which the advantages of international presence have only

begun to emerge or, at least, to be recognised” (see Mitchel et al., 1993, p. 650).

HOME MARKET PERFORMANCE AND INTERNATIONALIZATION 39

In particular, theoretical considerations are articulated and then empirically tested to

examine the relationship between home market performance and internationalization,

home market performance and choice of foreign market entry mode, and internation-

alization and home market performance. The arguments presented here are centered

on the dynamic resource-based view of a firm. The dynamic resource-based view is at

the core of strategic management theory and provides multiple theoretical arguments

for internationalization. Our empirical test relates to a sample of German insurance

groups writing property–liability business between 1999 and 2011, which first provides

a more profound observation period than prior studies by including the postfinancial

crisis years and, second, expands the base for the internationalization debate in the

insurance industry, which is still in its inception. The findings of this study have the

potential to offer significant implications for home-based insurance groups planning

international diversification of their property–liability business, as well as insurance

groups that already run international property–liability business.

The remainder of this study is structured as follows. The next section reviews the liter-

ature related to internationalization in the insurance sector. The third section explains

the conceptual background of this study followed by the “Data and Methodology” sec-

tion. The fifth section presents the empirical results and the final section presents the

conclusion.

LITERATURE REVIEW

In the past decade, several studies have made first inroads into the internationaliza-

tion debate in the insurance industry. From an economic perspective, one end of the

spectrum of academic research has investigated macroeconomic and industry-specific

factors and their impacts on foreign insurers’ participation as well as market profitability

(Ma and Pope, 2003, 2008a, 2008b; Cole et al., 2007). For instance, Ma and Pope (2003)

explore factors describing the desirability of international insurers’ involvement and

find that a more liberal market structure and higher gross domestic product are im-

portant factors for (Organisation for Economic Co-operation and Development (OECD)

countries’ attraction to international property–liability insurers. Further, they find that

for noncompetitive markets, reducing trade barriers would significantly increase insur-

ers’ desirability to enter these markets. Deepening our understanding on the market

liberalization–profitability relationship for a selection of 23 nonlife markets, Ma and

Pope (2008a) find an interactive relationship between market concentration and market

liberalization on profitability, whereby market profitability varies with the level of mar-

ket liberalization and reverses at high levels of market concentration and liberalization.

Finally, Cole et al. (2007) include firm-specific factors into their economic perspective

for the investigation of the eclectic paradigm for the U.S. reinsurance market for the

period 1996 through 2000. Their findings confirm that market size, loss experience, and

competitive environment are key determinants revealed by reinsurers for international-

ization. Notably, more profitable U.S. reinsurers assume less risk from foreign markets,

whereas size and geographic concentration positively affect reinsurers to assume risks

from foreign markets. Due to the nature of the reinsurance business, which allows in-

tensive internationalization without significant, physical presence in host countries, the

result by Cole et al. (2007) (more profitable reinsurers assume less risk from foreign

markets) cannot be easily transferred to European primary insurer’s businesses without

additional empirical evidence.