The influence of ownership structure on internationalization

Ontology:The

ontology of the article is positivist because this study is survey based and
authors have applied different statistical techniques to test the hypotheses.

Epistemology: Epistemology of the article is objectivist.

Article Review:
The research paper that is reviewed is related to firms internationalization and explains the
influence of ownership structure on a firms degree of internationalization. It also describes the
main regions of international diversification and finds relationship between both.
In section two of the article, the foundations are discussed which provides a discussion of
internationalization from firms point of view and both managers and owners point of view.
Then author analyzed the effect of different ownership situations on a firms degree of
internationalization and derive a hypothesis. In the section three, hypothesis is tested and
discusses findings. In last section of this paper, conclusion is presented.
First of all, there is a discussion related to internationalization from the firms point of view.
Firms internationalization is the extension of its business across borders. The common reasons
of firms internationalization are:

Utilization of monopolistic advantages

The internationalization of imperfect markets
Market seeking motives
Leveraging industrial economic effects
The gain in operational flexibility
The opportunity for organizational learning

According to some other researchers, firm can reduce its risk by spreading its activities over
economically not integrated and uncorrelated markets. This is related to the theory of portfolio
diversification that argues that the risk of portfolio can be reduced by spreading the investments
into uncorrelated assets. Risks can be described as:

Fluctuations of cash flow

The total profits, demand and sales
The prices on factor markets
Changing political conditions
The threat of bankruptcy

There are some other reasons of internationalization other than those which are mentioned above.
The other reasons are related to managers and owners exist within the firm.Managers which are
also known as the agents of the firm always look for maximization of their own utility. Thats
why the behavior of manager-controlled firms is different to the behavior of owner-controlled
firms. Managers-controlled firms want to maximize sales not profits. They are more diversified
and make such decisions that smooth income. These goals of managers contradict to the owners
goal of firms value maximization.
Through internationalization, managers can gain two main benefits which are reduction of their
portfolio risk and private benefits.
1. Managers of any firm have interest in reducing the firms risk because their wealth is
linked to the firms wealth. Thats why the risk of managers income and wealth is
closely related to the risk of the firm. Managers are very much concerned about the risk
of their income and wealth, thats why they want diversification to reduce firms risk and
also their own risk.
2. Another benefit that managers can achieve is related to managerial private benefits.
Some examples of such private benefits are corporate jets, plush offices and empire
building. Diversification helps the managers in the sense that they can increase their
autonomy from domestic pressure such as governmental agencies, banks and
shareholders.
At the end of section two, owners point of view is discussed on internationalization. The firms
owners are always interested in maximization of firms value. The shareholders should be aware
of agency conflict and take two steps to avoid:

By giving incentives to the managers to act in the shareholders interest. These can be in
terms of profit-sharing schemes, bonuses, stock options, and ownership participation.
By monitoring the managers, owners can control the managers behaviors. But in most
cases, this monitoring is incomplete because managers personal information cannot
directly observed by the shareholders.

In the third section of this paper, the hypotheses are tested and find out the impact of the
ownership structure on a firms internationalization diversification. By putting all arguments, it is
concluded that
1. Managers are interested in high degree of internationalization than the owners.
2. Managers preferences are not affected by the ownership structure.
3. The owners preferences regarding international diversification are a function of the size
of their ownership stake.
4. If the managers are also shareholders of the firm, they become even more risk averse as
their overall income and wealth is tightly bound to the firms wellbeing.

5. In firms with highly dispersed ownership, the managers have more degrees of freedom to
pursue their own interest than in firms with concentrated ownership.
Then hypotheses are tested by using panel data derived from 102 largest German manufacturing
firms in the years 1990-2006 and find out the results which are follows:
Owners are risk-neutral and prefer value-maximizing strategies, but as the amount of their wealth
invested into a single company increases, they become more and more risk-averse. As a result,
they use their growing control rights to compel the management to conduct internationalization
strategies according to owners preferences.
At the end, the researcher concluded by giving following arguments:

Firms ownership structure and its international diversification are closely linked.
The ownership structure should be considered as an important factor for a firms
internationalization when conducting future research.
Managers should be monitored while shareholders follow a rational logic when deciding
about the degree of their monitoring of the managers.

There are two future implications for practical applications:

1. Corporations could increase their attractiveness for investors by implementing
governance structures.
2. Investors seeking a low-risk investment opportunity could participate in risk
diversification via international diversification.

Limitations:
A main limitation of this study is that some important factors are not considered that
could influence the degree of internationalization. Those factors are market for corporate
control, the managerial labor market, and the product market.
Another limitation is that only largest shareholders are analyzed for this study.
Considering other owners would be a useful extension for further research.
This analyses treated shareholders as a homogeneous group and didnt consider the
identity of shareholders which also matters.

References:
Hymer, S. H. (1976). The international operations of national firms.A study of
direct foreign investment.

Jenson, M. C., &Meckling, W. H. (1976). Theory of the firm: Managerial

behavior, agency cost and ownership structure. Journal of Financial
Economics.
Amihud, Y., & Lev, B. (1981).Risk reduction as a managerial motive for
conglomerate managers.Bell Journal of Economics.