The degree of internationalization and multinational corporations' profitability

Researchers have argued that multinational corporations have firm-specific advantages (internalization theory and eclectic theory) that provide them the opportunities not available to purely domestic corporations to arbitrage the differences in the economic and political environments, taxes, laws and exchange rates of the different countries they operate in, enabling them to generate higher profits. Past studies have documented the benefits of multinational operations. Therefore, we should observe a positive correlation between the degree of internationalization (DOI) and profitability. However, past studies provided varying results. One of the major shortcomings of past studies is the lack of a measure to determine the level of foreign operations or degree of internationalization of multinational firms. Daniel Sullivan (1994), in his paper entitled "Measuring degree of internationalization of a firm," developed a measure of degree of internationalization that incorporates several important dimensions of multinational operations not included in other studies of this nature. He also provided a list of companies ranked according to this index. His analysis covered the three-year period from 1988--1990. This study evaluated the performance of the firms in the list for the period 1991--1996 to determine the relationship between the degree of internationalization (using the DOI index developed by Sullivan) and profitability. The results of this study found a positive correlation between the level of foreign operations measured by DOI and multinational corporations' profitability.