The Role of Internationalization Strategy in Fostering Innovation: An Empirical Study Using Machine Learning Technique

Mayer, Pascal; Schäper, Thomas

Abstract

In today’s highly dynamic global market, firms increasingly conduct R&D internationally to enhance their innovation and competitiveness. We analyze the relationship between firm internationalization strategy and innovation performance. We argue that the relationship is inverse U-shaped, due to concave returns and convex costs of firm internationalization regarding innovation performance. We test our hypothesis using a novel machine-learning technique and develop a dictionary on internationalization, based on the most-cited papers on firm internationalization. We then apply this dictionary to firms’ 10-K annual reports to obtain a unique score of each firm’s internationalization strategy and use panel data econometrics to analyze the relationship with innovation performance. The results support the hypothesis of an inverted U-shape relationship between firms’ internationalization strategy and innovation performance. Further tests substantiate the findings. Our study contributes to the literature on firm internationalization and firm innovation by identifying a trade-off in benefits and costs of firm internationalization.