THE EFFECT OF INTERNATIONALIZATION ON HOME MARKET
PERFORMANCE: EVIDENCE FROM GERMAN INSURANCE
GROUPS
Muhammed Altuntas University of Cologne
Department of Risk Management and Insurance D-50923 Cologne Telephone: +49-221-470-5805 Fax: +49-221-428349 Email: [email protected] Gerrit Gößmann University of Cologne
Department of Risk Management and Insurance D-50923 Cologne
Email: [email protected]
THE EFFECT OF INTERNATIONALIZATION ON HOME MARKET
PERFORMANCE: EVIDENCE FROM GERMAN INSURANCE
GROUPS
ABSTRACT
In this paper we investigate the effect of internationalization on home market performance using survey data and financial statement data of German insurance groups with property-liability business for the years 1999 through 2009. We develop a resource-based perspective and argue that strategic transformation is a major factor driving insurance groups’ internationalization, whereby successful international insurance groups facilitate organizational learning from interna-tional operations to enhance home market performance. Our findings corroborate this notion and show that the establishment of branch offices as well as greater internationalization is positively correlated with home market performance.
JEL Classifications: G22, L25, F23
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THE EFFECT OF INTERNATIONALIZATION ON HOME
MARKET PERFORMANCE: EVIDENCE FROM GERMAN
INSURANCE GROUPS
INTRODUCTIONA firm’s decision to expand operations to international markets has far reaching impli-cations that can shape operations for multiple years and impact its future profitability and growth opportunities (Altuntas and Berry-Stölzle, 2010). Recognizing the importance of inter-nationalization, researchers have extensively examined firm-specific, industry and environmen-tal factors driving international expansion and performance. Focusing on the performance im-plications of internationalization, firm-specific factors have been heavily explored in order to explain performance differences across manufacturing firms (e.g., Bühner, 1987; Grant et al., 1988; Daniels and Bracker 1989; Tallman and Li, 1996; Hitt et al., 1997; Ruigrok and Wagner, 2003). Although researchers theorized that theories developed to explain the internationaliza-tion of manufacturing firms are applicable to service firms (Boddewyn, Halbrich, & Perry, 1986; Katrishen and Scordis, 1998), researchers criticized this notion and required service firms’ internationalization to be analyzed separately because of the inseparability of production and consumption of the product or service which drives service firms to expand internationally in a distinct manner (Capar and Kotabe, 2003; Contractor et al., 2003). In consequence, aca-demic research has investigated internationalization in the insurance and reinsurance industry (Ma and Pope, 2003; Outreville, 2008; Cole et al., 2009). For example, Cole, Lee and McCullough (2009) investigate the factors that influence reinsurers’ decision to assume resurance from foreign countries, whereas Ma and Pope (2003) examine the determinants of in-ternational insurers’ participation in foreign markets. Also, academic research related to the
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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-Stölzle, Hoyt and Wende, 2010). However, the corporate focus on inter-nationalization either defined as the function of organizational, location and industry ad-vantages as in Cole, Lee and McCullough (2009) or international performance implications de-fined as the degree of product and international diversification as in Ma and Elango (2008) ne-glects to test the empirical whether internationalization has an effect on home market perform-ance. Since there is long-standing empirical evidence that an international firm in a global in-dustry has advantages in its national markets (e.g. Dunning, 1973; Kim et al., 1989; Rugman, 1979; Vernon, 1971), the only study that provides empirical insights on the effects of firms’ international expansion on the home market was done by Mitchell, Shaver and Yeung (1993). Latter showed that international expansion will be beneficial in transition industries1, and sug-gest that incumbents which adapt to the changing environment by increasing their global pres-ence, particularly firms with some prior international experience and a strong base in the home market, will often survive and gain market share.
This article attempts to broaden the focus of internationalization literature of financial firms by examining three issues:
First, the article examines the effect of insurance groups’ internationalization on home market performance. In other words, this work splits insurers’ corporate business into home market and international business in order to analyze the impact of the fact that an insurance group operates internationally on the home market performance. Second, the relationship be-tween the choice of market entry mode and home market performance is analyzed. Lastly, the
1 Transition industries are those in which the advantages of international presence have only begun to emerge or,
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effect of insurance groups’ degree of internationalization on home market performance is in-vestigated. Thus, instead of investigating the well-known question of the effect of internation-alization on corporate performance, we are interested in the effect of the extent of international-ization on home market performance.
In particular, theoretical considerations are articulated and then empirically tested to ex-amine how internationalization influences home market performance. The arguments presented here are centered around the resource-based view of the firm. The resource-based view is in the core of strategic management theory and provides multiple theoretical arguments for perfor-mance implications of internationalization. Our empirical test relates to a sample of German insurance groups ceding property-liability business across the years 1999 through 2009 which first provides a more profound observation period than prior studies and secondly enhances the base for the internationalization debate in the European insurance industry which is still in its inception. The findings of this research have the potential to offer significant implications for home based insurance groups planning to internationalize their property-liability business, as well as insurance groups that already run international property-liability business.
The remainder of this article is structured as follows. The next section reviews the liter-ature related to internationalization in the insurance sector. Thereafter, the conceptual back-ground of this study is explained. This is followed by the data and methodology section. The fifth section presents the empirical results and the final section concludes.
LITERATURE REVIEW
In the past decade, several studies have made first inroads into the internationalization debate in the insurance industry. Concentrating on the challenges faced by insurers through
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cal contingencies and global developments in the industry, a recent study by Cummins and Venard (2008) points out important global trends to be the increasing insurance product sophis-tication, globalization of risk diversification through reinsurance, the emergence of mega-financial intermediaries, the growing importance of supranational agencies and local heteroge-neity such as political, legal, and cultural components as well as differences in financial mar-kets, taxation, regulatory systems, insurer investment strategies and insurance distribution sys-tems. Outreville (2008) illustrates the emerging importance of European and Japanese insurers in international insurance business that has occurred between the years 1986 and 2003 as well as the positive impact of location-specific factors such as market size, human capital, regulato-ry barriers, competitive and cultural distance and good governance that attract insurers to ex-pand into countries with such conditions.
Looking from an economic perspective, one end of the spectrum of academic research has investigated macroeconomic and industry-specific factors and its impacts on foreign insur-ers’ participation as well as market profitability (Ma and Pope, 2003, 2008a, 2008b; Cole, Lee and McCollough, 2009). For instance, Ma and Pope (2003) explore factors describing the de-sirability of international insurers’ involvement and find that more liberal market structure and higher gross domestic product are important factors for OECD countries’ attraction to interna-tional non-life insurers. Further, they find that for non competitive markets reducing trade bar-riers would significantly increase insurers’ desirability to enter these markets. Deepening our understanding on the market liberalization-profitability relationship for a selection of 23 non-life markets, Ma and Pope (2008a) find an interactive relationship between market concentra-tion and market liberalizaconcentra-tion on profitability, whereby market profitability varies with the lev-el of market liberalization and reverses at high levlev-els of market concentration and market
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alization. Lastly, Cole, Lee and McCollough (2009) included 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 experi-ence, and competitive environment are key determinants revealed by reinsurers for internation-alization. Another notable result is that more profitable U.S. reinsurers assume less risk from foreign markets, whereas size and geographic concentration positively affect reinsurers to as-sume risks from foreign markets. However, due to the nature of reinsurance business that al-lows intensive internationalization without significant, physical presence in host countries, the results by Cole, Lee and McCollough (2009) are of limited evidence for the insurance industry and for insurance groups ceding property-liability insurance in particular.
On the other end of the spectrum, researchers have concentrated on firm-specific factors to either explain economies of scale (Katrishen and Scordis, 1998) or corporate performance implications of internationalization (Ma and Elango, 2008; Schoenmaker, Osterloo and Winkels, 2008; Berry-Stölzle, Hoyt and Wende, 2010). For example, Ma and Elango (2008) investigate the impact of internationalization on corporate performance for U.S. property-liability insurers and find insurers with low product diversification levels to benefit of interna-tionalization, whereby with increasing levels of product diversification insurers suffer of exten-sive internationalization. Another more recent study by Berry-Stölzle, Hoyt and Wende (2010) investigating successful business strategies for insurers in emerging countries provides evi-dence that concentration on life insurance, insurer’s growth rate and increased size positively affect performance in emerging markets.
In sum, prior studies have neglected to isolate home market business from international business to investigate the effect of internationalization on home market performance. Further,
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none of the mentioned studies applies a theoretical perspective which grounds on the resource-based view of the firm, revealing our study to provide a more complete picture of the organiza-tions’ determinants impacting home market performance. Lastly, our study is the first to inves-tigate internationalization for a non U.S. based insurance industry, therefore adding empirical evidence for the European insurance industry.
CONCEPTUAL BACKGROUND AND HYPOTHESES
Our analysis of the relationship between internationalization and home market perfor-mance as well as the choice of market entry mode and home market perforperfor-mance is built upon the resource-based view literature. Firstly, we pose the working definitions for our remaining work before we review the literature of the resource-based view and highlight the importance in regard to internationalization. Finally, we develop our hypotheses.
Working definitions
In this study, international diversification or interchangeably internationalization means that an insurer affiliated to a group earns positive direct premiums written in property-liability lines in at least one country outside Germany. In this sense, this definition is narrower than typ-ical definitions in strategic management which, for example, define internationalization solely as a firm’s expansion beyond the borders of its home country across different countries and ge-ographical regions (e.g. Capar and Kotabe, 2003). Thus, internationalization does not mean group internal value creation by insurance groups’ service entities outside the home country that has no impact on the direct gross premiums written.
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Further, we only investigate insurance groups with property-liability business lines in regard to our research questions. In analogy to Liebenberg and Sommer (2008), who define multi-line insurers as those ceding more than one line of business, we define a composite in-surance group to have at least two insurers with property-liability business affiliated. Instead, specialized insurance groups have only one property-liability insurer affiliated to the control-ling group organization.2
The resource-based view
Heterogeneity of capabilities and resources in a population of firms is one of the corner-stones of resource-based theory (Peteraf, 1993). A firm’s resources are all “those tangible and intangible assets which are tied semipermanently to the firm” (Wernerfelt, 1984: 172). For in-stance, knowledge about investment instruments, quantitative models, access to trading plat-forms, and the like can be viewed as independent resources. Capabilities refer to a combination of resources that creates higher-order competencies (Madhok, 1997). The efficient exploitation of a firm’s resources and capabilities as well as their effective and efficient development are the main drivers of competitive advantage (March, 1991). In other words, bundles of resources and capabilities lie at the heart of a firm’s competitive advantage (Mehra, 1996). Therefore, if a firm holds the ability to implement a value creating strategy to establish a situation to be ahead of its competitors, then a competitive advantage may yield systematically superior returns (Wernerfelt, 1984; Schoemaker, 1990). However, only if a firm exploits its competitive ad-vantage to cement its lead – thus, creating a situation when other firms are unable to catch up and to duplicate the benefits of this strategy – then this competitive advantage is suggested to be a sustained one (Barney, 1991). In this sense, firms can exploit resources and capabilities to
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establish sustained competitive advantages to yield higher levels of profitability than the com-petition (Barney, 1991). Although market-based frameworks suggest that it is the market that determines the value of resources, mirrored in privileged end-product market positions as a ba-sis for above normal performance (Makhija, 2003), we build our hypotheses on resource-based view arguments because the consideration of foreign market environments would exceed the desired simplicity of the theoretical framework.
Hypothesis development
Internationalization and home market performance
Grounding on resource-based theory, researchers have argued that firms with strong core competencies that have been developed in the home country can be utilized in internation-al markets (Bartlett and Ghoshinternation-al, 1989). Put differently, firms with specific advantages can leverage these advantages across geographic boundaries to provide firm-level and competitive advantages (Teece, 1985, 1986). Finally, the competitive advantages that produce greater prof-itability in the domestic markets provide motivation to apply the same competences in interna-tional markets to further enhance a firm’s profitability (Porter, 1990).
Conversely, firms not having resources that are valuable, rare, imitable and non-substitutable have no ground to implement a value-creating strategy that can earn above aver-age returns (Barney, 1991). Following this logic, firms without superior home market perfor-mance are generally not expected to possess resources and capabilities that enable to generate superior returns in international markets. However, internationalization is acknowledged as a route to strategic renewal which is largely undertaken by incumbent firms (Agarwal and Helfat, 2009). Thus, internationalization of firms without superior home market performance may
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ground on the recognition that the development and decay of resources and capabilities are quintessentially important to a firm’s strategic future (Winter, 2007). In this sense, internation-alization mirrors an attempt to refresh or replace existing resources and capabilities as a basis for future growth (Agarwal and Helfat, 2009). Recent evidence on the current state of cross-border activities in the European insurance industry corroborates this notion and shows that about 55 percent of the business of insurance groups is conducted abroad (Schoenmaker et al, 2008). Studies by the OECD (OECD, 2005) and CEA (CEA, 2005) confirm the tenure that the European insurance industry is strongly internationally diversified. In this sense, it sounds rea-sonable to believe that internationalization shares a negative relationship with home market performance for the following reason: if insurance groups without superior performance ex-pand internationally, strategic transformation must take place before benefits of internationali-zation are transferred to the home market. Corroborated by the finding by Cole, Lee and McCollough (2009) that there is a negative relationship between U.S. reinsurers’ international-ization and performance, the first hypothesis evolves:
Hypothesis I: Internationalization shares a negative relationship with insurance groups’ home market performance.
Market entry mode and home market performance
In this part, we shed light on the question how the expansion mode into foreign markets may influence home market performance. Three major modes of market entry exist: entry via a subsidiary, branch office or via cross-border business. In this work, we define a subsidiary as an economically dependent and judicial independent corporation which can directly or indirect-ly influence the controlling corporation (Emmerich and Habersack, 2010). It is claimed that a subsidiary in control of another corporation is dependent from the corporation which is holding
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the majority of the subsidiary’s shares (Emmerich and Habersack, 2010). A subsidiary is gen-erally incorporated in the target country and is subject to supervision by the target countries’ authorities and therefore statistically treated as a foreign company belonging to the German holding (Cummins and Venard, 2007).
Instead, a branch office or interchangeably termed as “location” is defined as an eco-nomically independent and judicial dependent corporation. Put differently, a branch office is every fixed place of business that serves for a company to conduct business (§12, AO). Within the European Union, it is forbidden to apply restrictions for the conduction of services for cor-porations of member states which are domiciled in another country than the target country where the services are offered (Schwarze, 2009).
The third market entry mode, here termed as attendance or interchangeably cross-border business, is subject to the Freedom to Provide Service (FPS) agreement. This way, carriers can offer insurance business in all EU countries by being supervised by their home country authori-ty (Cummins and Venard, 2007). For such attendance business, no additional investments are required. For instance, an insurer may cede direct premiums via attendance by covering a do-mestic clients’ property-and liability risks of foreign production facilities within another EU member country. It must be noted that the insurance business conducted in the foreign EU countries is economically accounted for the judicial entity in the home country. As noted by Farny et al. (2011), the direct premiums written by German domiciled insurers via cross-border business in other European countries remain imprecise.
Since internationalization entails capability replication of firms’ core capabilities in other geographic markets (Winter and Szulanski, 2001), the preferred mode to exploit a firm’s in house resources and capabilities would be establishing a new subsidiary (Erramilli, Agarval
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and Dev, 2002; Madhok, 1997). Bartlett and Ghoshal (1998) describe four different roles of subsidiaries within an organization and their contribution to overall competitiveness. Depend-ent on dimensions of knowledge, technology, marketing and the like, a subsidiary may function as a strategic leader, contributor, implementer, or a black hole. Subsidiaries located in strategi-cally important markets, or competitors’ home markets – the strategic leaders – develop and implement broad strategic thrust for the whole organization. Conversely, firms’ subsidiaries in strategically important markets with minimal capabilities – the black holes – function as pure monitoring entities without any thrust for innovation. However, latter solution has turned out to be unsuitable to analyze the global implications of local developments to prevent erosion of firm’s position in other markets. To contribute from international development, subsidiaries must become a player, and not remain a spectator. Thus, it sounds compelling to believe that a sophisticated international strategy acknowledges the opportunities of environmental diversity to capability development and therefore fosters the establishment of subsidiaries in foreign markets.
In this sense, a subsidiary may not only contribute to capability replication, retrench-ment or retireretrench-ment, but might also lead to a renewal or recombination of firms’ capabilities in some way (Helfat and Peteraf, 2003). Thus, subsidiaries may help firms to obtain and develop what Teece (2007: 1346) terms ‘entrepreneurial fitness’ in order to continuously renew capa-bilities to attain long-term competitive advantage. This entrepreneurial fitness is about sensing, seizing and figuring out opportunities and how to address them. In our example, entrepreneuri-al management would have to go beyond anentrepreneuri-alyzing and optimization and search for approaches to unshackle the firm from the past, stay ahead by augmenting knowledge assets, protecting them, establishing new value-enhancing asset combinations, and transforming organizational
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and, if necessary, regulatory and institutional structures (Teece, 2007). The ability to integrate and combine assets including knowledge is a core skill (Kogut and Zander, 1992). Latter may especially be required when demands of niches change as the nature of the industry changes.
On the other hand, the establishment of subsidiaries requires notable tangible and intan-gible asset investments since a subsidiary is a judicial independent corporation that is also fully liable for all its activities and offered services in the target country. Therefore, we reveal the basic idea by Bartlett and Ghoshal (1998) that establishing foreign operations by a local pres-ence which develops the required thrust to influpres-ence the whole organization will have the po-tential to leverage home market performance. However, subsidiaries offer the doors for cross-subsidization (Kogut, 1985). In this sense, it may be that due to strong competition in key tar-get markets, cross-subsidization may occur (Kogut, 1985) which diminishes performance in the home market. Thus, the market entry mode of a branch office is expected be the more flexible one which combines the advantages of the important strategic presence as noted by Bartlett and Ghoshal (1998) and the required flexibility paired with lower investments and economic inde-pendence which leaves out the threat of cross-subsidization (Kogut, 1985).
Thus, we hypothesize the following:
Hypothesis II: The market entry mode of a branch office in international property-liability business is positively linked to increasing home market performance, whereby the subsidiary mar-ket entry mode is expected to be negatively related to home marmar-ket performance.
Degree of internationalization and home market performance
Most analyses on internationalization have focused on its effect on firms’ overall per-formance (e.g. Bühner, 1987; Capar and Kotabe, 2003; Contractor et al., 2003; Daniels and Bracker, 1989; Grant et al., 1988; Geringer et al., 1989; Hitt et al., 1997; Ruigrok and Wagner,
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2003; Tallman and Li, 1996). Thus, it is not surprising that there is only one study by Mitchell et al. (1993) that has addressed the changes of home market performance following interna-tionalization. Analyzing five medical sector industries by American firms operating in the United States, their results suggest that international expansion is positive for firms in domestic and transition industries, as long as the international stage does not become saturated with global players. However, the general message of their findings is that firms need a strong do-mestic base and some international experience in order to adopt successfully and gain market share. Firms that fail to react in the right direction, either because they do not recognize the un-dergoing changes or lack the resources and experience to increase international expansion will usually suffer and lose market share. We observe if insurance groups with property-liability business that realize internationalization advantages such as volume economies, intelligence gathering, product improvement, operational flexibility and stability, tax arbitrage, and organi-zational advantages (e.g. Chakravarthy and Lorange, 1984; Harris et al., 1991; Hirsch and Lev, 1971; Katrishen and Scordis, 1998; Kogut, 1985; Leibenstein, 1966; Lessard, 1979; Teece, 1980) will perform well in their own home market (Mitchell et al., 1993).
Revealing the arguments of the resource-based view, firms that possess competencies and resources which are distinctive or superior relative to those of rivals may become the basis for competitive advantage if they are matched appropriately to environmental opportunities (Andrews, 1971; Thompson and Strickland, 1990). Such resources and capabilities may pro-vide both the basis and the direction for the growth of the firm itself (Peteraf, 1993). However, firms with extensive international operations often achieve superior performance (Morck and Yeung, 1991). Only firms with substantial market share and international experience gained prior to an industry transition can expand successfully in international markets (Mitchell et al.,
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1993). A worldwide company’s exposure to a range of environmental stimuli represents an im-portant potential advantage over national companies, and transnational management propo-nents foster the development of multiple organizational assets, and ensure that the whole firm has access to them (Bartlett and Ghoshal, 1998). Bartlett and Ghoshal (1985) suggest that mul-tinationals initial knowledge repository may well be the strength that enables to establish or-ganizational diversity in international markets in the first place, leading to environmental learn-ing that results from the diversity internalized by the multinational as one ‘key explanatory of its ongoing success’ (Bartlett and Ghoshal, 1998: 413). The latter logic seems reasonable as a theoretical argument described by Jovanovic (1982) suggests that firms enter international markets at low size and expand if they are successful, so that survival will be linked with great-er profitability in the long-run. In sum, resource-based arguments suggest the following hy-pothesis:
Hypothesis III: An increasing degree of internationalization positively moderates insurance groups’ home market performance.
However, other factors are also expected to promote insurance groups’ home market performance:
Size
Firm size is widely used to control for economies and diseconomies of scale on the cor-porate level (e.g. Hitt et al., 1997, Ma and Elango, 2008; Luhnen, 2009). Cummins and Zi (1998) reported large insurers to have higher operational efficiencies. Larger firms have lower insolvency risk and should be able to charge higher prices than smaller insurers (Sommer, 1996) leading to better capital endowments. Organization size is a common factor used to
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measure the capacity of the firm (e.g., Aaby and Slater, 1989; Ali and Camp, 1993; Javalgi, Griffith, and White, 2003). Based on previous research, we use the natural logarithm of a firm’s assets as a measure for firm size (Ma and Elango, 2008; Luhnen, 2009). Size is expected to positively moderate insurance groups’ home market performance.
Risky
Loubergé (1983) and Galan and Gonzalez-Benito (2001) are among many authors who suggest that participation in the global marketplace can serve as a form of risk diversification. Corroborating this notion, Cummins and Venard (2008) argue that insurers can mitigate the effects of underwriting cycles by diversifying their risk exposure by line and geographically. We define riskiness as the ratio of stock and real estate to total assets mirroring the risk of an insurance groups’ investment, whereby the expected impact on home market performance re-mains unclear.
Product-Diversification
Insurers can diversify their operations by participating in multiple lines of business. One strand of researches has found that specialized insurers outperform diversified insurers (Hoyt and Trieschmann, 1991; Tombs and Hoyt, 1994; Cummins et al., 2003; Liebenberg and Sommer, 2008). Conversely, supporters of the conglomeration hypothesis have found diversi-fication to lead to increased performance (Meador et al., 2000; Villalonga, 2004). We measure product diversification (PDIV) in terms of a Herfindahl index of premiums on product lines, calculated as 1-∑pi². pi represents the percentage of an insurer’snet premium written on product
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line i. Given the contradicting results of prior research the anticipated relationship between product-diversification and home market performance is unclear.
Mutual
In the insurance industry, the organizational types of stock insurers, owned by stock-holders, and mutual insurers, owned by policystock-holders, coexist. On one end of the spectrum, mutual insurers are hypothesized to generate greater cost efficiencies by a better control of the manager-policyholder relationship. On the other end of the spectrum, stock insurers have greater access to capital and endure higher pressure to maximize profits (Colquitt et al., 1999). We dummy a mutual insurance group (MUTUAL) as 1 if the organizational type of the insur-ance group is a mutual and zero otherwise. Stock insurers have an advantage over mutual in-surers by the access to capital markets (Cummins et al., 2004). However, insurance groups in the German market exhibit mixed organizational forms. Although most mutual insurance groups’ do-mestic subsidiaries are stock corporations, these insurance groups are accounted as mutual holdings as noted by Farny et al. (2011) and not as stock holding companies. Such insurance groups with the organizational form of a mutual that hold subsidiary firms with the organizational form of stock corporations are expected to combine the advantages of both organizational forms. Therefore, it is expected that the organizational form of a mutual insurance group has a positive impact on home market performance.
Leverage
Leverage is expected to affect the probability of bankruptcy. When companies are in fi-nancial distress, they try to avoid bankruptcy by restructuring their assets and liabilities (As-quith, Gertner and Scharfstein, 1994). Jensen (1989) has even argued that highly leveraged
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firms that are in financial distress should find it easier to restructure out of court. Since they are highly leveraged, they trigger financial distress even if operations have not deteriorated much. Highly leveraged companies are likely to compete less aggressively for market share when there is greater urgency to produce current cash flows (Opler, Saron and Titman, 1997). In some cases, the less aggressive stance taken by a financially distressed firm may actually work to the advantage of all the firms in the industry. Financial leverage affects firms’ risk of equity return, but its influence is likely to be felt more strongly among firms that are not doing well (Chan and Chen, 1991). High current financial leverage may restrict the firms' accessibility to external financing, especially during tight credit periods. And since highly leveraged compa-nies are subject to cost of debt, we expect that they are more cautious when underwriting risk.
Following prior research by Elango, Ma and Pope (2008) we control for this relation-ship by including a proxy for a firm’s leverage (LEVERAGE), where the leverage ratio is de-fined as liabilities divided by a firm’s surplus, common stock, and preferred capital stock. We expect this variable to share a negative relationship with home market performance.
Capitalization
Sommer (1996) finds that safer insurers are able to command higher prices. Following Liebenberg and Sommer (2008), capitalization is measured as the ratio of policyholder surplus to total assets. However, in their investigation of internal capital markets in insurance groups, Powell, Sommer and Eckles (2008) argue that when an insurer increases its premiums written, there are three possibilities in order to maintain the probability of bankruptcy: first, holding more capital, second increasing premiums ceded to reinsurers and lastly altering the loss expo-sure. Since internationalization offers insurers to diversify their loss exposure, we expect a
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negative relationship between capitalization and internationalized insurance groups’ home market performance.
Life
Although our sample firms all write P/L insurance, several firms in the sample also write L/H business. We control for an insurer’s participation in both industries by including a dummy variable (LIFE) equal to 1 if the insurance group also sells life insurance products and 0 otherwise. Hoyt and Trieschmann (1991) compare risk–return relationships between publicly traded insurers that specialize in either P/L or L/H insurance and those that diversify across both major segments of the aggregate insurance industry. They find that specialized insurers performed better over the sample period of 1973–1987. Tombs and Hoyt (1994) examine the relation between stock returns and product-line focus for a panel of 26 insurers (operating in P/L and L/H) for the period 1980–1990. In their regression analysis of stock returns on focus and several controls, they find that stock returns are positively related to focus. Thus, both Hoyt and Trieschmann (1991) and Tombs and Hoyt (1994) provide evidence consistent with the strategic focus hypothesis. Given the fact that the majority of prior empirical literature sup-ports the strategic focus hypothesis, we expect LIFE to share a negative relationship with home market performance.
In addition to the control variables, we included line of business controls and year dummy variables in our model. Since insurers with many lines of business are subject to more risk, we additionally control for lines of business as proxy for riskiness. Therefore, in all stages line-of-business controls are included, which represent the proportion of business written in
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that line of business. Year dummies are included in each regression to control for potential bias triggered by a year.
DATA AND METHODOLOGY
Our initial sample was constructed by the following rules. To be included, a firm had to: (1) be a ceding insurance group licensed in Germany and offering property-liability cover-age in at least one line-of-business, (2) exhibit positive premium incomes greater than 40 mil-lion euro in the year 2009 on the German market and (3) show positive premium incomes dur-ing the period 1999 through 2009.
The property-liability industry was chosen since it is the first to benefit from economic growth in developing countries and because the property-liability insurance sector has matured in developed economies during the last decades (Swiss Re, 2008b). The period 1999 to 2009 has been chosen for three reasons. First, it covers the bulk of internationalization in response to the introduction of the euro as the single currency in 11 of the 15 EU member states on 1 Janu-ary 1999 (Swiss Re, 2008a). Second, several efforts to liberalization and deregulation of insur-ance markets, the proliferation of supranational free-trade areas, the harmonization of account-ing standards, were undertaken duraccount-ing this period (Cummins and Venard, 2007; Cummins and Venard, 2008). Third, for the first time true price and product competition in property-liability insurance has become true in the European insurance market (Cummins and Weiss, 2004), which enables us to test the hypotheses adequately. We merged this home market data sample with primary data of a survey capturing for international operations for all insurance groups of our initial sample. Our resulting sample of unbalanced data is representative for German insur-ance groups with property-liability business.
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Our only screen is to exclude insurance companies under public law because these cor-porations are not allowed to expand their operations internationally by institution. The im-portance of insurance companies under public law is minor, both with respect to the number of companies and the premium volume written (Cummins and Venard, 2007). Therefore, we ex-cluded all insurance companies under public law from our analysis. For the residual number of 98 insurers, we first sent a questionnaire to the companies and then conducted standardized tel-ephone interviews. 93 of the 98 property-liability insurers participated in our survey which cor-responds to a response rate of 94%. These insurance companies account for more than 90% of the overall premium volume of the German property-liability insurance market. The 93 insur-ance companies were then aggregated to groups. For unaffiliated insurinsur-ance companies, each single company was accounted as its own group. Our final sample of unbalanced data compris-es 521 company-year observations.
Foreign markets
The dependent variable for hypothesis I, II and III is home market performance. Two accounting-based measures were initially considered as possible indicators of insurance groups’ home market performance: return on assets (ROA), and return on equity (ROE). An important justification for using ROA is that insurance groups hold significant amounts of as-sets (e.g. stocks, bonds, real estate). ROA reflects accounting performance and is equal to net income (surplus) divided by total assets. This measure is in line with many prior studies that have used either ROA or return on sales (ROS) or both for capturing firm’s overall perfor-mance (e.g. Contractor et al., 2003; Daniels and Bracker, 1989; Geringer et al, 1989; Ruigrok and Wagner, 2003). To detect the determinants of home-market performance, we focus on time
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series variation in the foreign-market profile of insurance companies. The specification of the mod-el is as follows:
ROAi t, 1INTi t, 1 2Xi t, 1 i t, (1)
where ROAi t, is equal to net income (surplus) divided by total assets for insureri in year
t, INTi t, 1 is an indicator variable denoting whether insurer i is internationalized and has foreign
business (INT=1) or solely active in one insurance market, called home-market (INT=0), X is a
vector of control variables, and i t, is a random error term. All independent variables are lagged one year to mitigate potential endogeneity. Standard errors are adjusted for firm-level clustering. A negative and significant estimate for
1 would support hypothesis I.The model also includes year dummy variables and line of business controls. The line of business control variables measure the fraction of premiums written in each line of business and, hence, capture differences between business lines including differences in the loss distributions and volatilities of the business lines.3 To control whether the results are stable over time, we estimate
the same model using two-year lagged independent variables.
Market entry mode
Hypothesis II focuses on the mode in which the insurer enters foreign markets. We ana-lyze the effect of different entry modes on home market performance. As entry modes we dif-ferentiate between a subsidiary (Subsidiary) and a branch office (Location). While a subsidiary denotes an economically dependent and judicial independent corporation which is exclusively established for the foreign market and is characterized by a high embedment in local network
3 The lines-of-business included in the calculation are: personal accident, personal liability, total auto, legal
ex-penses, fire, homeowners’ personal property, residential and commercial building damage and transportation. The omitted category is the aggregate of credit insurance and other miscellaneous business.
24
with strong customer relations and great local government support (Birkinshaw and Hood, 2000), however, a branch office is an economically independent and judicial dependent corpo-ration which is established with the main purpose to evade control commissions in the foreign markets. To detect the determinants of home-market performance, we focus on time series varia-tion in the foreign-market profile of insurance companies in which the specificavaria-tion of the model is as follows:
ROAi t, 1Subsidiaryi t, 1 2Locationi t, 1 3Xi t, 1 i t, (2)
where ROAi t, is equal to net income (surplus) divided by total assets for insureri in year
t, Subsidiaryi t, 1 is a dummy variable denoting whether insurer i has a subsidiary in the foreign
market, Locationi t, 1 is a dummy variable denoting whether insurer i has a branch-office in the
foreign market, X is a vector of control variables, and i t, is a random error term. All independent
variables are lagged one year to mitigate potential endogeneity. Standard errors are adjusted for firm-level clustering. A negative and significant estimate for
1 and a positive and significantes-timate for
2 would support hypothesis II. The model also includes year dummy variables and line of business controls.Degree of internationalization
For hypothesis III, we analyze how the degree of internationalization in foreign proper-ty-liability business affects home market performance. Although the measure of foreign sales to total sales has been widely used in literature on the relationship between internationalization and overall performance (e.g. Contractor et al., 2003; Daniels and Bracker, 1989; Geringer et al, 1989; Hitt et al., 1997; Ruigrok and Wagner, 2003), we measure the degree of
international-25
ization as the ratio of foreign sales to home market sales (FSHS). Foreign sales to home market sales is an alternative measure to the widely accepted foreign sales to total sales ratio and stresses the relative importance of foreign business in relation to home market business. To de-tect the determinants of home-market performance, we focus on time series variation in the for-eign-market profile of insurance companies. The specification of the model is as follows:
ROAi t, 1FSHSi t, 1 2Xi t, 1 i t, (3)
where ROAi t, is equal to net income (surplus) divided by total assets for insureri in year
t, FSHSi t, 1 the ratio of foreign sales to home market sales, X is a vector of control variables,
and i t, is a random error term. All independent variables are lagged one year to mitigate potential endogeneity. Standard errors are adjusted for firm-level clustering. A positive and significant esti-mate for
1 would support hypothesis III. The model also includes year dummy variables and line of business controls, and similar to Equation (1), we also estimate the same model using two-year lagged independent variables to control whether the results are stable over time.RESULTS
Univariate Results
In this section, we start with the presentation of our analysis’ results before we draw four brief case studies that illustrate the findings.
Figure 1 reports the total number of insurance groups writing business in the German property-liability market and the number of these insurance groups writing business in coun-tries outside Germany for the years 1999 through 2009. As can be depicted from Figure 1, the ratio of internationalized groups has increased from 33% in 1999 to 46% in 2009.
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--- Insert Figure 1 about here ---
Table 1 presents a complete variable list. Panel A reports the variable definitions for the internationalization variables and firm-specific domestic market variables used in this study. The impact and importance of these variables may differ and is outlined in the section “Con-ceptual Background and Hypothesis” of the paper. Panel B shows the summary statistics for all firms in the sample.
--- Insert Table 1 about here ---
As a next step in our analysis, we compare the univariate statistics of internationalized insurance groups with purely domestic insurance groups. Table 2 compares the sample means and medians of the internationalized insurance groups, and the means and medians of all the other insurance groups.
--- Insert Table 2 about here ---
We can see that the average internationalized firm is much larger than the average domesti-cally oriented firm. Internationalized firms have, on average, higher leverage, exhibit more risky assets and are more likely to be stock companies in their home-market. However, these firms
ex-27
hibit a relatively low ROA, a relatively low capital to asset ratio and are more likely to be diversi-fied in terms of business lines.
Regression of Insurer Performance and Internationalization
The results of our OLS model estimation in which the home-market ROA is the de-pendent variable (see Equation (1)) are presented in columns 1-4 of Table 3. The international-ization indicator is one of our independent variables.
--- Insert Table 3 about here ---
The models presented only vary with respect to the time-lag. In all models we focus on determinants of insurer performance with respect to the home-market, however, the interna-tionalization indicator is included in models 1 and 3. All independent variables in models 1 and 2 are measured in year t-1, whereas independent variables for models 3 and 4 are measured in year t-2. Year dummies and line of business controls are included in each regression; standard errors are adjusted for firm-level clustering and appear in parenthesis below each coefficient estimate.
In models 1 and 3 the coefficient on the internationalization indicator variable (INT (t-1) and INT (t-2)) is negative and significant, indicating that the average internationalized insur-er is less profitable in the home market than the avinsur-erage domestic insurinsur-er. The results confirm our hypothesis I: internationalization is negatively related to home-market performance.
As predicted, the variable size is significant and positively related to home-market per-formance, and, leverage is highly significant but negatively related with home market
perfor-28
mance in all four models. These results indicate that larger insurers and insurers with less lev-erage are, on avlev-erage, more profitable in their home market business.
Interestingly, insurers with the organizational form of a mutual exhibit, on average, a higher home market performance than stock firms. Mutuals perform better than stocks in their home-market.
Additionally, we see on average, that insurers which solely focus on property-liability business perceive higher home market performance than insurers writing life insurance busi-ness in addition. 4
As robustness checks, we estimate different regression models. First, we replace ROA in Equation (1) with the risk-adjusted return on asset (RAROA) as dependent variable to cap-ture an alternative financial performance measure (e.g., see Browne, Carson and Hoyt, 2001).5 Since we employ RAROA as dependent variable, we desist from time-lags for the independent variables to avoid data losses:
RAROAi t, 1INTi t, 2Xi t, i t, (4) We than estimate Equation (4) including the same independent variables as Equation (1) and perform OLS regressions and random-effects versions.6 The results considering the
in-ternationalization effect on home-market performance is consistent with the regression results from Equation (1) and confirm hypothesis I once again; the coefficient on internationalization
4 We investigate whether multicollinearity is an issue in our models by inspecting variance inflation factors in our
regression diagnostics. The general rule is that multicollinearity may be a problem if variance inflation factors exceed 10 (Belsley, Kuh and Welsch, 1980). Considering all regression models, the highest mean value of the variance inflation factor is 4.43, which confirms that multicollinearity is not a problem in our sample.
5
RAROA is calculated by ROAi t, /SDi t, 2 i t, .
6 The estimation of a fixed-effects model requires variations in all independent variables for each firm in . Such
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is negative and significant in all appropriate models. To conserve space, these results are not reported.
In a next step, we compare the univariate statistics of insurance groups with the market entry mode of a foreign subsidiary and others. Table 4 compares the sample means and medi-ans of internationalized insurance groups with subsidiary market entry mode with those inter-nationalized groups with another market entry mode.
--- Insert Table 4 about here ---
Insurers with a subsidiary in foreign markets have, on average, higher FSHS. These in-surers are more likely to adjust their foreign market strategies with that of their domestic mar-ket (see Adjustment). In other words, these companies seem to have a holistically group-wide strategy in which they fit foreign and domestic market issues. Interestingly, when we focus on the insurers’ business strategy in foreign markets and use the dimensions provided by Porter (1980), we can see that groups with a subsidiary are more diversified in terms of number of insurance products they offer, while the others also pursue a strategy of cost leadership.
Table 5 focuses on the impact of the choice of market entry mode on home market per-formance. The results illustrate that it is the home market performance implications differ by the type of market entry mode. For instance, conducting foreign business with branch offices has a significant and positive effect on the average insurance groups’ home market perfor-mance, whereby conducting international business via subsidiaries, on average, shares a signif-icant and negative impact on home market performance. Further, we see that the firm specific domestic variables leverage and capital to asset in the home market share a negative and
signif-30
icant relationship with home market performance. This indicates that insurance groups’ high leverage ratios as well as high equity endowments negatively influence home market perfor-mance as outlined in the section “Conceptual Background and Hypothesis” of the paper.
--- Insert Table 5 about here ---
Table 6 presents the results on our third hypothesis, the relationship between the degree of internationalization and home market performance. As can be depicted from Table 6, past FSHS has a positive and significant impact on home market performance. In other words, the average internationalized insurance groups with a high FSHS ratio is more profitable in the home market than the average internationalized international insurance group with a small FSHS ratio. The results show that increasing the FSHS ratio by 1 percent leads, on average, to a higher home market performance of 0.7 percent. Consistent with the second hypothesis, lev-erage is highly significant and shares a negative relationship with home market performance. Capital to assets is also significant and negative, but shares a less significant relationship.
--- Insert Table 6 about here ---
In sum, the models provide evidence on the hypothesis of
1. The effect of internationalization on home market performance (Table 3),
2. the effect of the choice of market entry mode on home market performance (Table 5) and finally
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3. the effect of the degree of internationalization on home market performance (Table 6).
For the first hypothesis, internationalization has a negative impact on home market per-formance. In other words, more profitable insurance groups with property-liability business in the home market are less active in conducting property-liability in international markets. At the end of the spectrum, the most profitable insurance groups in the home market cede, on average, no international business. Thus, our hypothesis is confirmed that insurance groups with interna-tional business are more likely to be less profitable on the home market. By virtue of our argu-ments, this finding is not surprising at all:
The results highlight the importance of internationalization for insurance groups as what Agrawal and Helfat (2009: 281) call “strategic renewal”. Internationalization is therefore a vehicle to obtain valuable resources and capabilities that enable the company to purposefully create, extend, or modify its resource base in order to affect long-term prospects in a substan-tial way (Agrawal and Helfat, 2009; Helfat et al., 2007). Another argument why internationali-zation is negatively related to home market performance is because of the mature or decline of the primary market, forcing insurance groups to seek new avenues for growth in the property-liability outside the home market. In Germany, such a mature of the primary market is perti-nent. Thus, for a portion of German insurance groups writing property-liability coverage it is more rational to go abroad than battling for marginal markets shares or new product market areas at home. In sum, our results show that internationalization is a diversification mode that has negative performance impacts for the home market business.
For the second hypothesis, conducting international business via branch offices has a positive and significant impact on home market performance, whereby subsidiaries have a
neg-32
ative impact on home market performance. On one end of the spectrum, the average insurance group that operates foreign property-liability business with the market entry mode of a subsidi-ary suffers of decreasing home market profitability in property-liability business. On the other end of spectrum, the average internationalized insurance group running international business operations via branch offices exhibits higher home market performance than insurance groups operating internationally via cross-border business or subsidiaries.
Finally, for the third hypothesis, the dependent variable home market ROA is positively associated with an increasing degree of internationalization. Thus, our hypothesis is confirmed that insurance groups that enter international markets and expand successfully will benefit of greater profitability in the home market. This finding corroborates the notion by Bartlett and Ghoshal (1998) that worldwide firms’ exposure to a range of environmental stimuli represents an important potential advantage over national companies if transnational management propo-nents foster the development of multiple organizational assets and ensure that the entire organ-ization has access to them. In other words, the average insurance group with a higher degree of internationalization is more profitable on the home market than the average insurance group with a smaller degree of internationalization. Of course, the greater degree of internationaliza-tion may be due to a pure reducinternationaliza-tion of revenues in the home market. However, even such a case would suggest that for insurance groups, on average, it seems to be more rational to de-fend or extend foreign sales rather than battling to protect the home market premium volumes.
33 Case Examples
To flesh out our statistical analysis and give prescriptive advice for managers in regard to internationalization, we turn to four brief case studies of insurance groups in our sample that followed different paths of internationalization.
Winner
The first firm realized increased sales in international markets during our observation period, while it reshaped its business in its home market. The insurance group is a conglomer-ate insurance group and exhibits a medium line-of business diversification in property-liability lines, with focus on motor insurance. In 1999, the firm was mainly dependent on home market operations, exhibited a FSHS ratio of 31% and ranked among the top 20 of German insurance groups in terms of premium incomes. One decade later, things had changed radically. The in-surance group had increased its FSHS ratio in P/L lines up to 270% and therefore changed from a home market oriented group with international aspirations towards an established inter-nationally oriented insurance group. The group strongly increased its international property-liability business operations between 1999 and 2009, in part because it could build on its strong expertise in motor vehicle insurance from the home market. Moreover, as motor insurance is usually the first to benefit during an economic expansion (Swiss Re, 2008b) the insurance group has realized its fast internationalization pace in part from outstanding motor insurance growth rates in the emerging markets insurance landscape. The introduction of mandatory mo-tor third party liability (MTPL) coverage in the Middle East, Turkey and China (Swiss Re, 2008b) is one example. Having gained a foothold in the strategically important motor insurance line in the emerging markets may have been one determinant for the insurance groups’
interna-34
tionalization successes. On the other hand, the group reshaped its size on the home market to attain what Teece (2007: 1346) calls ‘entrepreneurial fitness’. The exposure to multiple envi-ronmental stimuli facilitated the insurance group’s dynamic capability development, for in-stance by innovating its products and processes on the home market from what the group had learned abroad.
Newcomer
The second insurance group is a newcomer in foreign property-liability business and experienced extensive growth during our observation period. The insurance group is a special-ized insurance group that offers several lines in property-liability business. By 1999, the insur-ance group had no foreign operations and was a purely domestically focussed. Ten years later, the group exhibited a FSHS ratio of 100% in property-liability business and had increased its total premium incomes by 85%. Thus, the argument growth through internationalization is true in this case. However, the international newcomer’s premium income in the German home market retrenched by about 10%, partly because it focussed on the more prospective foreign markets than battling for marginal market shares at home. There is no doubt that the interna-tional newcomer has been successfully replicating its strength to offer all in one policies com-bined with qualified counselling to make new inroads into the international business environ-ment. The newcomer’s internationalization trajectory is astonishing since it mirrors the path from a purely national insurance group towards an international niche player.
35 Complacent
The complacent insurance group did not neither increase nor decrease its ratio of FSHS during the period 1999 through 2009. This group is a conglomerate and highly diversified in terms of property-liability business lines. However, in 1999, the insurance group could be clas-sified as a pure home market player with a FSHS ratio of less than 1%. Ten years later, things looked quite equal. The insurance group was still a pure home market player which had de-fended its position in the German property-liability market. And even in 2009, the ratio of for-eign sales to home market sales accounted for less than 1%. However, during the period 1999 through 2009, the complacent firm’s home market premium income increased by about 10%, wherein the German property-liability sector grew by more than 25% in the same period. Thus, although the complacent insurance group sustained its domestic position and its FSHS ratio during the period 1999 through 2009, it was neither able to catch up with the national growth pace, nor to exhibit growth rates that could keep up pace with the yearly emerging markets’ growth rate in overall property-liability insurance business of about 10% (Swiss Re, 2008b).
Loser
The fourth insurance group experienced a pitfall in international sales while it tried to perpetuate its property-liability business on the home market. The group is a small and special-ized group that serves selected target groups with the full range of property-liability insurance products. In 1999, the groups’ foreign sales to home market sales ratio accounted for more than 38%. By 2009, the share of foreign sales to home market sales had been completely eroded to less than 1%. One reason may be that problems encountered in one of the lines of business out-side the property-liability lines may have triggered the firm’s decision to divest from existing
36
foreign property-liability businesses and to focus the remaining resources on the stabilization of the groups’ core-business activities in the property-liability sector on the home market. In sum, the total premium income in the property-liability line retrenched by about 20% over the period, wherein the national premium growth of 17% could not recoup the erosion of foreign premium incomes.
Implications
There are several common threads in the preceding four cases. Three of the four insur-ance groups started with some degree of international activity. Additionally, all insurinsur-ance groups are active in the property-liability insurance business. Therefore, three insurance groups had a base from which to develop internationalization of its property-liability insurance busi-ness.
At the same time, three distinctions between the more successful and less successful participants stand out. First, the German property-liability business of the winner and the new-comer insisted strong positions in the home market when they started or continued their inter-nationalization process. At least one of the less successful firms, meanwhile, was undergoing financial and structural difficulties on the home market. The winner’s and the newcomer’s ex-pertise, their position in the key German market and their superior capabilities in their product lines provided the base for successful international growth.
The second difference lies in the apparent use of overseas operations. The winner and newcomer improved their product portfolio offered in the German home market by incorporat-ing know-how from their operations in other national markets. This is in line with the advice by Bartlett and Ghoshal (1998: 153) that local presences play an important strategic role in a
37
transnational company as the firm’s ‘innovative spark plugs’. It corroborates the notion that the creation of learning, the sharing of knowledge, and knowledge-integrating procedures are likely to be critical to long-term business performance (Chesbrough, 2003; Nonaka and Takeu-chi, 1995). It seems compelling that the less successful firms have used their foreign operations primarily as sales outlets or service stations for international customers, rather than as opportu-nities to accrue knowledge advantages that may be shifted across national boundaries. The winner and newcomer not simply utilized international operations for purposes of growth. In line with the advice by Kogut and Zander (1992), they recognized international operations and the opportunity to integrate and combine assets including knowledge to be a firm’s core skill.
Lastly, the more successful (the winner and newcomer) firms chose a strategy that bal-anced opportunities arising from global developments and local contingencies in insurance markets. Both insurance groups carefully identified promising and strategically important na-tional markets with long-term growth prospects where they could gain a foothold by offering tailored products basing on their core knowledge from the home market. In detail, they recog-nized the saturation of the domestic market, rising growth opportunities in the emerging mar-kets and market niches in other European Union member countries. Thus, the successful insur-ance groups constantly scan, search and explore for opportunities across markets, both local and distant (Nelson and Winter, 1982), and address these opportunities discovered in interna-tional markets, indicating a clear internainterna-tional strategy to exist. In contrast, the expansion into foreign markets of the complacent and loser were less strategically driven than the winner’s and newcomer’s internationalization. In detail, both unsuccessful insurance groups followed their clients abroad instead of establishing a real international business strategy. Thus, their in-ternationalization was rather service for existing customers than a real strategic issue.
There-38
fore, a clear internationalization strategy that pools existing core capabilities with external op-portunities is an important ingredient to succeed in international markets.
CONCLUSION
This study investigates the effect of internationalization on home market performance, the influence of the market entry mode on home market performance as well as the relationship between the degree of internationalization and home market performance. Our first result shows that internationalization negatively influences home market performance. For the first relationship, we also find that size moderates insurance groups’ home market performance, in-dicating that economies of scale may be apparent. For the second relationship, our findings show that the market entry mode of a branch office has a positive impact on home market per-formance. For the third relationship, we find an increasing degree of internationalization to be positively associated to home market performance. This indicates that internationalization may be beneficial also for the home market organization when the insurance group is able to in-creasingly shift its business towards foreign countries.
The study’s first finding is surprising since it complements prior theoretical arguments by researchers. In this tradition, firms that realize internationalization advantages such as vol-ume economies, intelligence gathering, product improvement, operational flexibility and stabil-ity, tax arbitrage, and organizational advantages (e.g. Chakravarthy and Lorange, 1984; Harris et al., 1991; Hirsch and Lev, 1971; Katrishen and Scordis, 1998; Kogut, 1985; Leibenstein, 1966; Lessard, 1979; Teece, 1980) are expected perform well in their own home market
39
(Mitchell et al., 1993). However, our findings contradict this notion and show that on average, internationalization does diminish home market performance.
Arguing from a resource-based view perspective, one explanation could be that domes-tic insurers constantly deploy their slack capacities in the domesdomes-tic setting to sustain their com-petitive stance. Put simply, less diversification suggests the presence of more firm-specific re-sources that normally yield higher rents (Mahoney and Pandian, 1992). Thus, domestic insurers may retain resources and capabilities which they exploit to address market-niches that have the potential to yield extraordinary returns in the home market which an internationalized insur-ance group may not have.
The second finding of this study also corroborates our expectations, but adds new em-pirical insights for the market entry literature in the insurance industry. Revealing that subsidi-aries in the form of strategic leaders create the necessary thrust to influence the whole organi-zation (Bartlett and Ghoshal, 1998) and that firms with extensive international operations often achieve superior performance (Morck and Yeung, 1991), it is surprising that subsidiaries share a negative relationship with home market performance. Instead, branch offices seem to create the necessary strategic thrust. This may be because branch offices are economically independ-ent and are made responsible for their performance results. These results may facilitate to learn from foreign operations in order to attain performance improvements in the home market when the foreign branch offices exhibit high performance results. Instead, the subsidiary is economi-cally dependent. This economic dependence may harm the desired strategic thrust since subsid-iaries may be nurtured by other profitable parts of the organization.
The study’s last finding is also not surprising and supports theoretical arguments stressed by Mitchell et al. (1993) and Bartlett and Ghoshal (1998) that insurance groups that