Hutzschenreuter and Voll (2008) introduced the “added distance” concept in international business strategy. They showed the negative impact on German multinational enterprise (MNE) performance of multiple investment steps with a high added distance in aggregate. This paper aims to explore the generalizability of this finding using a Penrosean perspective and quasi-replicating their methodology.
Empirically, the authors focus on the context of Indian firms, posteconomic liberalization (1991), where a much wider spectrum of magnitudes of added distance could be observed than in the German case. The authors use data of 109 Indian firms with expansion paths the authors tracked during periods ranging from 6 to 31 years.
The authors show that moderate added distance enhances performance in the subsequent period, but only up to a threshold. The underlying reason for this outcome is a meta-bounded-rationality challenge: senior managers underestimate how the aggregate of multiple international investment steps with added cultural distance, each supposedly beneficial to the firm, leads to unmet demands for managerial capacity and reduces corporate coherence.
The major research implication of the work is that studies in international business should not make use of dyadic, macrolevel distances in studies on implications of internationalization on performance.
The findings highlight that MNEs must match international expansion opportunities with adequate managerial resources. For senior executives, careful planning of internationalization steps and attention to the cumulative distance added in each period is crucial to avoid negative performance effects of over-expansion.
To the best of the authors’ knowledge, this is the first empirical study that shows in a comprehensive way, over a long period of time, the impact of “added distance” on the relationship between internationalization in one period and performance in the period immediately following.It demonstrates the vulnerabilities of MNEs when expanding abroad in a too ambitious fashion and extends Penrosean thinking is this realm.
