International coherence and MNE performance

We introduce the concept of International Coherence (IC) to describe the degree of relatedness in a multinational enterprise (MNE). We propose that IC hinges on the interplay of the relatedness between any two MNE units and the linkages that tie them together. Linkages can be thought of as the often costly “pipes” that allow the “content”, that is, resources and information that define relatedness, to “flow”. We argue that greater IC increases the potential of an MNE to generate economies by facilitating resource sharing and diffusion, as well as learning and knowledge creation among MNE units while controlling corresponding bureaucratic costs. In turn, this will lead to superior MNE performance. We also hypothesize that firms facing high levels of competition will have greater incentives to capitalize on IC. To test our hypotheses, we first estimate the relatedness between units by the revealed unit relatedness using data on nearly a half a million global investments by all public MNEs worldwide. We then use this information and data on 960 US MNE units’ locations to estimate IC and find support for our hypotheses. Our results indicate the potential for IC as an important new facet of multinationality.