Expanding internationally sounds good for business — but in the Asia-Pacific region, it might actually hold back profitability, a new study found.

Researchers analyzed 16,333 publicly traded nonfinancial firms in 17 Asia-Pacific countries between 1990 and 2016 for a paper published April 12 in the International Review of Economics & Finance. In 1992, only 3% of firms were "multinational," but by the end of the period, 19% of firms had business operations outside their home countries. 

Previous studies — many of them looking at shorter time frames — have found mixed results on companies' performance; this study, by contrast, found that on average, international firms were less profitable than firms that stayed home. An increase in foreign investments of one standard deviation — 10% — could be associated with a return on assets 23.75% lower than the mean. 

The study showed that the negative effect on profitability was partly explained by a drop in revenue growth and, in the short term, a drop in cost efficiency that was associated with international operations. Authors Napaporn Likitwongkajon and Chaiporn Vithessonthi, both based in the Asia-Pacific region, wrote that they might have uncovered potential methodological problems in prior work. 

"There's a debate: Why have we gotten to see mixed results?" said Vithessonthi, a co-author and a professor of finance at Sunway University Business School. "There are different arguments, one of which is sort of saying that the impact is supposed to be in the long run. However, very few papers actually test the long-run impact of foreign investment on performance." 

Notably, Vithessonthi himself had previously found that foreign investments have no impact on a firm's performance. 

In the current study, Vithessonthi and Likitwongkajon broke out seven "developed" nations, including Australia, Hong Kong and Korea and 10 "developing" nations, including China, India, Indonesia, Malaysia and Vietnam. They also controlled for other factors and firm characteristics, including the ratio between assets and liabilities, the size of the business and performance volatility. 

The statistical analysis revealed that foreign investments hampered revenue growth and firm performance, and that part of the international investments' effect on firm performance was explained by the effect on revenue growth. In this study, "performance" was a measure of return on assets.

Furthermore, when the researchers analyzed firms with a higher ratio of foreign to domestic assets — i.e., more foreign assets — the researchers found that there was no longer an effect on short-term profitability; firms with more investment in other countries were fine. 

"My view — I hope my co-author agrees with me — is that there are no one-size-fits-all strategies," Vithessonthi told The Academic Times. "Basically, it's not easy to compare larger firms in two industries and say why Firm X goes overseas and makes a lot of profits."

The paper, "The short- and long-run effects of foreign investments on firm performance: Evidence from Asia Pacific," published April 12 in the International Review of Economics & Finance, was authored by Napaporn Likitwongkajon, Khon Kaen University; and Chaiporn Vithessonthi, Sunway University.