The Transnationality Index: Measuring the diversity advantage of transnational entrepreneurial organizations

Transcription

1 The Transnationality Index: Measuring the diversity advantage of transnational entrepreneurial organizations By David H. Tobey, Doctoral Student Department of Management College of Business & Economics New Mexico State University P.O. Box Las Cruces, New Mexico USA Tel: (540) Fax: (505) Brent Kinghorn, Doctoral Student Department of Management College of Business & Economics New Mexico State University P.O. Box Las Cruces, New Mexico USA Tel: (505) Fax: (505)

2 ABSTRACT The transnational organization concept represents an epistemological challenge to entrepreneurship researchers (Drori, Honig, & Wright, 2007) because we lack a measurable characteristic that distinguishes a transnational entrepreneurial organization from a born global export/import or a multinational small business. To address this problem, we propose an index that calculates the geographic diversity of a company s value chain to clearly demarcate the boundaries between different global organizational forms along a continuous scale The Transnationality Index. Low scores on the index represent domestic organizations while high scores indicate an equal distribution of value chain functions across multiple locations. Scores in the middle range include the continuum of export/import, outsourcing, and multinational organizations who have increasing proportions of their value chain distributed across national boundaries, but not to the extent of a transnational organization. We review the literature related to the varying forms of international entrepreneurship, using the Transnationality Index to resolve conflicting findings that result from misspecification of organizational form. We discuss how capabilities and liabilities associated with specific index score ranges may explain success and failure of particular organizational forms under certain market conditions. We conclude by exploring the implications for using the Transnationality Index to reframe and empirically analyze theories of globalization and international entrepreneurship. International, transnational, multinational, multidomestic, global, and born global are among many labels for businesses that reach beyond the country in which they were founded to establish presence in foreign lands. Researchers use many of these designations interchangeably which at best confounds explication of foreign expansion and at worst obfuscates comparisons and empirical analysis of international business theory. How do these various organizational forms differ? More importantly, can these differences be clearly demarcated to facilitate empirical analysis of theories of internationalization whether it occurs around the time of the founding of an entrepreneurial organization or in subsequent stages of business growth? The purpose of this paper is to clarify these definitions of foreign expansion and the corresponding theoretical implications by proposing an index that measures international diversification based on geographic scope and resource allocation. The proposed Transnationality Index contributes a standard basis for comparing the level and form of internationalization which should facilitate improved understanding of the processes underlying the creation of competitive advantage across national boundaries. 2

3 Why do we need an index of internationalization? Michael Porter in his introduction to an edited compendium entitled Competition in Global Industries (1986, Boston: Harvard Graduate School of Business) noted that A global strategy [is] defined as one in which a firm seeks to gain competitive advantage from its international presence through either a concentrated configuration, coordinating among dispersed activities, or both Measuring the presence of a global industry empirically must reflect both dimensions and not just one. (p. 29) Historically, most attempts to derive a measure of the degree of internationalization have focused on single dimension measures that offered limited explanatory power (see Sullivan (1994) for a review and an attempt at re-conceptualization). Furthermore, most of these measures were based on foreign sales presuming that the only form of international expansion results from exports or establishment of foreign sales operations. However, the recent explosion of outsourced manufacturing and logistics functions suggests that the dispersion of a firm s value chain (Porter, 1986; 1990) needs to be considered by researchers seeking to understand the dynamics of foreign expansion and the creation of competitive advantage. It seems intuitively obvious that widespread geographic expansion of sales offices would reflect a fundamentally different strategic configuration than the dispersion of support functions around the globe while maintaining a sales focus on a domestic market, or in limited foreign markets. Unless we distinguish between these two forms of foreign expansion, or include both dimensions in assessing the degree of internationalization, it seems likely that we will not be able to understand the strategic positioning, comparative advantage, and operational implications of a firm s international strategy. Simply focusing on foreign sales and profits is insufficient. As a former vice president of Motorola has commented, What does it really mean when 75 percent of our profit is outside the U.S. and 60,000 people are outside the U.S.? (Ulrich, 1997). Early research on international new ventures established a typological framework that offers a theoretical basis for combining these two dimensions to clarify the semantic relationships among the various forms of foreign expansion. In their seminal article, Oviatt and McDougall (1994) proposed that the interaction between geographic scope 3

4 and value chain coordination results in four types of international new ventures: export/import; multinational; multidomestic, and global startups (see Figure 1 below). They further suggest that export/import and global firms represent extreme forms along a continuum while the other two are mixed forms. While they make predictions regarding sustainability of these organizational forms, they do not provide a method by which to identify where a specific firm may lie along this continuum. Figure 1 Source: Oviatt and McDougall (1994) Furthermore, while providing a basis to demarcate varying forms of foreign expansion, the simplified 2x2 structure omits the International and transnational organizational forms previously proposed as more extreme forms of diversification than the global firm (Bartlett & Ghoshal, 1989). Thus, while Oviatt and McDougall discuss a prototypical global firm, Momenta Corporation, with manufacturing and funding occurring around the world, they do not consider the possibility that firms with greater dispersion of value-chain activities might represent a different organizational form. Simply differentiating between few and many geographic locations and value chain activities seems insufficient to clearly demarcate the boundaries between various strategic configurations. 4

5 Consequently, researchers attempting to link international diversification and performance have found average international diversity in sample firms ranges widely which questions the validity of statistical analyses that assume variance homogeneity. For instance, Capar and Kotabe (2003) found that when comparing service to manufacturing firms the opposite curvilinear relationship exists between diversity and performance, but they note their results may also be explained by an increased scope of governance, resources, or products exceeding management capabilities for control. The motivation underlying strategic choice in these firms may significantly differ depending on where they lie along a continuum from export/import to the transnational organization (Barkema & Vermelen, 1998). Capar and Kotabe conclude that it is desirable to have multiple or different indicators to capture the international activities of firms more fully (p. 353). We contribute the Transnationality Index as a measure that captures this diversification along both dimensions of geographic scope and resource allocation among value chain activities. Our development of the Transnationality Index shall proceed as follows. First, we will review the current state of defining the organizational forms that arise from foreign expansion. Second, we will discuss prior attempts to establish measures of diversification and the degree of internationalization. We will demonstrate how these attempts have inappropriately directed research towards identifying industry or product diversity rather than the distribution of resources across the value chain that may provide a more effective demarcation of the boundaries between organizational forms. Third, we will propose to calculate a score for each firm using a formula for diversity that has received strong empirical support within the field of ecology for almost fifty years. We believe ranges of this Transnationality Index will be associated with specific organizational forms along the continuum from Domestic to transnational organization. Finally, we will conclude the paper by considering the implications of the Transnationality Index for predictions of strategic theory regarding the process and performance of foreign expansion under varying market conditions. 5

6 Forms of Internationalization The international strategy should be based on the conditions in which the organization finds itself (Porter, 1986). If the organization were competing in an industry environment with limited geographic scope and deployment of resources outside the domestic market, the strategy undertaken would be different from an organization competing in an industry with substantial geographic scope and value chain diversity. The strategies at the two extremes would likely be so different as to be easily identifiable. However, research has not been able to define clearly either the two extremes or other points along such a continuum. The difficulty comes from using similar terminology for the different points along the continuum. Some researchers even contradict themselves within the same article often comparing two organizations that are dissimilar with respect to either geographic scope or resource allocation. We seek to set establish clear definitions for terms identified by specific ranges along the continuum of domestic organizations to transnational organizations. In so doing, we provide a means of clarifying the similarities and differences among organizational form. Transnational is a term to describe a significant mix of diversity in both geographic scope and the allocation of resources conducting activities in these diverse markets. Transnational is the ultimate balance between centralization and decentralization. A transnational organization attempts to capitalize on both its global efficiencies and its local knowledge of market nuances. Transnational organizations are able to combine and leverage knowledge and learning from interactions in diverse markets. Additionally, each geographic location has the autonomy to alter any strategy based on specialized local knowledge. McDonald s is often used as an example of a transnational firm (Carpenter & Sanders, 2007). McDonald s uses its purchasing power to get the best prices from local markets for the global commodities it uses as inputs. They also customize menu offerings that cater to local tastes and cultural preferences. Thus, while they gain economies of scale in factor markets, they also develop economies of scope in developing mass customized product offerings. The interaction of these two forms of competitive advantage enable increasing returns to scale as a firm becomes more transnational in scope (Barkema & Vermelen, 1998). 6

7 The definition of the transnational form is one of a very few terms that is common among researchers. This may be because it is highly diversified in both geographic scope and resource allocation and therefore is much easier to recognize. The other end of the continuum is also easy to distinguish because of the uniformity of its resource distribution. A domestic organization form is one that lacks geographical diversity in both resource allocation and geographic scope. This type of organization sells its products within the one country in which it produces the product. Fewer and fewer organizations can be competitive in such an environment (Gupta & Govindarajan, 2000). However, given its easily identifiable lack of geographic reach and operational diversity, domestic organizations are easily detectable. Domestic and transnational organization forms represent the extreme poles of the continuum and the only definitions consistently held among researchers. The terms multidomestic, multinational, global, international, and export/import are used to represent the organization forms between those two extremes. While commonly used, definitions of these organizational forms vary to facilitate comparability across research streams. We propose to use four of these five terms, omitting international for which so little consensus exists in the literature that we were unable to determine the strategic configuration that would characterize its use. We define each of the remaining terms below. A multidomestic organization form replicates and extends much of its domestic operational activities in a limited number of geographic locations. Such an organization attempts to achieve the ability to be responsive to the local conditions and needs of the organization in the particular country. While the multidomestic organization has less geographic scope than transnational organizations, it has the same high level of value chain dispersion thereby enabling local responsiveness in each market it serves. The multidomestic organization may be limited in its geographic presence due to the type of product provided. The French global defense and aerospace electronics group Thales SA provides an example of this strategy. This former domestic firm uses its unique knowledge for the specialized industry of defense and aerospace electronics to be involved in several countries (Michaels, 2003). At the same time, the sensitive nature of 7

8 that same industry requires the organization to work autonomously within each country. Consequently, a multidomestic organization evolved. Closely related to the multidomestic organization form is the multinational organization form. The multinational organization has a more expanded geographic scope than the multidomestic organization, but its resource allocation is limited to one or a few elements of the value chain spread among the geographic locations resulting in a medium level of value chain diversity. Thus, multinational companies may be seen as either primarily distribution companies or sourcing companies based on their strategic configuration. Thus, the multinational organization is more focused on geographic expansion while less able to take advantage of global efficiencies since it lacks sufficient resources to replicate complete value chain solutions provided in the domestic and limited foreign markets. For example, as Lincoln Electric grew into a multinational organization, it used profit from one market to subsidize activities in another market (Carpenter & Sanders, 2007). While Lincoln Electric did cross-subsidize operations in other countries, it was unable to provide few other efficiencies to each independent operation, thus classifying it as a multinational. The global organization is a hybrid form that unequally distributes resources with medium to large geographic scope. This type of organization is focused more on global efficiency than the independent needs of the country in which it sells its products. Consequently, it may have widely varying value chain configurations in the markets it serves, making it less able to adapt to local market conditions. Organizations in this category sacrifice higher prices that follow customization for the cost reductions that follow global efficiencies. Global organizations will typically have more components of the value chain located spread throughout its geographic scope than a multinational but these resources will be much less equally distributed than a transnational, with several locations have few or no resources in one or more components of the value chain. Thus, the difference between the multinational form and the global form is the mix of operational activities taking place outside of the geographic area of origin, and these two organizational forms may be frequently confused unless one or both of their definitional boundaries are clarified. 8

9 The final organizational form is an export/import organization. Export/import organizations are very low in geographic reach, perhaps a country or two in addition to the home country, and are very low in relation to operational activities outside of the home country. Exporting is a popular vehicle for internationalization because the costs of entering new markets are minimal. Export/import organizations generally use local representatives or agents to sell or buy their products in these new markets. The main costs for an export/import organization are transportation and meeting the packaging and ingredient requirements of the target country. Consequently, they target markets that are relatively close to the domestic market. A large percentage of born global organizations use exporting as a vehicle to go global quickly (Moen, 2002). Table 1 summarizes the preceding discussion of organizational forms. These organizational types were developed from the literature and can be easily recognized based on their geographic scope and diversity of resource allocation activities. Table 1: Organizational Forms Domestic Export/import Multinational Global Multidomestic Transnational Geographic Scope Resource Allocation Activities NONE LOW MED MED MED HIGH NONE LOW LOW MED HIGH HIGH We contend that none of these organizational forms is better than the other. Instead, by identifying the organizational form we can assess the appropriateness of corporate strategy based on industry dynamics. In addition, comparisons of successful strategic development and implementation between similar organizational forms are facilitated by useful demarcations of those organizations. The question remains exactly how to measure and distinguish among these various forms of international organizations. We now turn to developing a measure that allows us to clearly differentiate these disparate forms of internationalization. The Transnationality Index The difficulty in distinguishing among the various organizational forms of foreign expansion has become the central epistemological problem to evaluate the differences 9

10 between organizational forms create by international entrepreneurs and the effectiveness of their internationalizing strategies. The label born global has been attached to new international ventures that operate across national borders in the early stages of development and growth. While some researchers believe the born global classification distinguishes firms by the speed at which they enter foreign markets (Oviatt & McDougall, 1994, 1999), others note that the larger research issue concerns the incongruence in the definition and scope of international entrepreneurship (Zahra & George, 2002, pp ). Thus, several researchers have attempted to develop measures of the degree of internationalization (e.g., Barkema & Vermelen, 1998; Bloodgood, Sapienza, & Almeida, 1996; Jacquemin & Berry, 1979; Zahra, Ireland, & Hitt, 2000). Most of these measures define internationalization in terms of the extent or degree of geographic scope the number of countries or regions in which the firm s products are sold or where its subsidiaries are located. Sullivan (1994) reviewed many of these studies and found that by far the most prevalent measure was a ratio based on foreign sales divided by total sales (FSTS). Furthermore, he found that the FSTS measure is unable to sufficiently explain variance in performance associated with organizational form. In fact, he found that any measure based on a single dimension has insufficient explanatory power and the results of studies using these measures are often confounded by company size, as larger companies typically have more subsidiaries. Others have found that the use of sales data risks introducing aggregation bias and may not accurately represent strategic intent (Hoskisson, Hitt, Johnson, & Moesel, 1993). A singular focus on sales seems to equate internationalization with product or industry diversification (Pitts & Hopkins, 1982) and ignores the coordination and local responsiveness which forms the core components of a transnational organization (Bartlett & Ghoshal, 1989). In their review of several measures of diversification, Bedein and Mossholder (2000) suggest that diversification is not the same as diversity, and that the former measures of dispersion are best applied when there is not theoretical reason why competitive advantages may accrue to individual firms based on their position along a continuum. Therefore, if we are to understand the strategic value of intentional configurations designed by company founders to exploit opportunities in foreign markets, 10

11 we must devise a new measure that considers diversity of resource allocations in addition to geographic scope. Almost fifty years ago, E. H. Simpson (1949) devised such a measure for assessing the ecological condition of species in an environment. Rather than simply counting the number of units across geographic boundaries, this index considers the form of resource distribution by calculating the probability of two organizations having similar structures. Furthermore since this compares resource distribution patterns, this measure is not biased by the size of the firm. The Simpson Index (applied to organizational analysis) would be calculated as follows. 1. Determining the percentage of resources for a geographic area associated with each stage of the value chain. 2. Calculate the sums of squares for this distribution of resources. The resulting calculation provides a measure of the homogeneity of distribution among individual firms in a competitive market. However, as Colwell and Futuyama (1971) point out this is really a measure of concentration, rather than diversity. Therefore, the inverse of this measure must be taken to create a coefficient of variation that enables comparison of patterns of diversification across varying resource states. This inverse of the Simpson Index we will call the Transnationality Index (TI) because it allows us to clearly demarcate a firm based on its distribution pattern of resources along a continuum from domestic to transnational. According to this index, as a firm both expands geographically and extends its value chain across national boundaries the index score will increase. A firm with almost all its resources located in a single stage of the value chain (e.g., a brokerage that uses third parties to conduct all value chain functions other than sales) would have a TI score approaching the minimum score of 1. Alternatively, a firm that has resources distributed equally across ten geographic regions would a TI score that approaches 60. As the index is sensitive to the total number of geographic regions that form the baseline for the analysis, and to facilitate data gathering, we recommend the use of country clusters, such as that developed by Ronen & Shenkar (1985), when gathering data for the analysis. Using the Ronen & Shenkar list, we conducted a bootstrap analysis of firms varying the levels of resource distribution and firm size (data and analysis available from 11

12 the authors upon request). For the purposes of this analysis we used personnel headcount as a proxy for organizational resources. The results are shown in Table 2 below. From this analysis we would expect that the TI index would range from a score of 1 for a domestic firm specializing in a single element of the value chain to a score of 50 for a transnational firm with nearly equal distribution of personnel across both value chain components and geographic regions. Table 2: Transnationality Index Ranges by Organizational Form Domestic Export/ Import Multi- Domestic Global Multinational Transnational Minimum Maximum It is important to note that generally there is little overlap between the organizational forms across the continuum, with the exception of the global and multinational forms where the latter is fully contained within the former. Earlier we defined a multinational organization as either primarily an outsourcing or an exporting organization depending on which elements of the value chain are distributed and which are concentrated in the founding country. Conversely, the global organizational form was defined as an uneven distribution of all elements of the value chain across geographic regions and as such it contains within it the multinational form which includes greater foreign resource allocation than a multi-domestic firm but less than the transnational organization. For example, consider three model firms shown in Table 3 that were derived from our bootstrapped sample. Each firm has approximately the same number of employees and the same ratio of foreign sales to domestic sales although they differ in both overall sales volume and the distribution of personnel resources across the nine country clusters, as well as the overall percentage of foreign to total personnel. According to the measures previously developed to analyze international diversity, these firms would either all be considered comparable (FSTS is nearly the same) or at least the global firm and the transnational firm would be considered comparable because they have nearly the same percentage of foreign personnel to total personnel. However, closer examination reveals substantial differences which are easily identified by the Transnationality Index. 12

13 Table 3: Comparison of Transnationality Index to FSTS Index Form: Exporter Domestic Headcount in Foreign Markets Headcount Support Activities Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Total Employees Total Sales 2.17 billion FSTS 82.5% Percent Foreign/Total 55.5% Diversity Index Form: Global Domestic Headcount in Foreign Markets Headcount Support Activities Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Total Employees Total Sales 0.66 billion FSTS 83.3% Percent Foreign/Total 90.9% Diversity Index Form: Transnational Domestic Headcount in Foreign Markets Headcount Support Activities Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Total Employees Total Sales 2.26 billion FSTS 80.1% Percent Foreign/Total 87.5% Diversity Index The first firm is an Export/import with the same headcount and sales as the transnational firm, but clearly the Export/import has substantially less distribution of resources across the nine country clusters with no personnel outside of sales and service being located in foreign offices. Yet, according to an analysis based on FSTS the export/import is more diverse, or at least as diverse, as the transnational organization with personnel almost equally distributed around the globe. In support of Sullivan s (1994) analysis, this example shows that a single measure (FSTS) is unable to adequately differentiate among these organizational forms. However, by combining the geographic scope with resource allocation, the Transnationality Index is able to show that the transnational firm is nearly four times as diverse as the Export/import. As Sullivan 13

14 suggests, this result would be expected by examining both FSTS and the total of foreign personnel to total personnel. In this case, the Transnationality Index both makes this analysis simpler (by offering a single index value) and offers a standardized coefficient that eliminates statistical artifacts due to scale differences between sales and personnel counts. Consequently, the Transnationality Index provides a continuous variable for use in empirical analysis of the strategic theories based on degree of internationalization associated with varying organizational form. The second firm utilizes a global organizational form that results in widely varied resource allocations across worldwide markets. Historically, this form has been often confused with the transnational form with researchers frequently using both terms interchangeably when describing a specific firm strategy. Like the Export/import, the global firm would have been considered more, or at least as, diverse as the transnational firm since it has a higher FSTS. However, unlike the prior example, in this case the global firm also a higher percentage of foreign workers as a percentage of total workers. This might lead a researcher to either assume that both firms are using comparable strategies or perhaps that the global firm is actually more locally responsive because more of its sales and personnel are located outside the domestic market. However, further analysis would suggest otherwise. The Transnationality Index predicts that the transnational firm is more locally responsive and requires higher levels of coordination because it more equally distributed around the globe. For instance, while Operations is more intensive under the global organization in Foreign Market #1, there is little marketing and sales activity and correspondingly fewer support resources required for this market. Therefore, it is not surprising that fewer resources are required for inbound logistics, but slightly more for outbound logistics as this region is primarily an export/import to other foreign divisions or third parties. Conversely, in the transnational organization, both Operations and Marketing activities are robust in Foreign Market #1 requiring greater resources across the board. With these increased resources in support logistics and throughout the value chain, we can expect that the transnational form would be more responsive to changes and challenges present in this market. Consequently, the Transnationality Index enables insights and empirically analyzable predictions by offering a continuous variable that 14

15 suggests that the transnational organization is nearly twice as internationally diversified as the global organization. The Transnationality Index represents an important analytical tool for understanding the strategic intent of founders and executive management of international enterprises. We have shown how it may enable clearer demarcation among the various organizational forms that have been proposed over many years of entrepreneurial and strategic management research. In the next section we will discuss the potential of the Transnationality Index to resolve conflicting findings that result from misspecification of organizational form. We discuss how capabilities and liabilities associated with specific index score ranges may explain success and failure of particular organizational forms under certain market conditions. We will conclude the paper by exploring the implications for using the Transnationality Index to reframe and empirically analyze theories of globalization and international entrepreneurship. Applying the Transnationality Index to theories of international diversification International expansion is not a panacea for organizations regardless of size, and it is intrinsically hazardous even though it promises revenue opportunities. International expansion can just as easily contribute to profitability as it can detract from it. Success requires that an organization s international strategy must be consistent with industry structure and dynamics (Porter, 1979) in order to exploit and further develop resources and capabilities (Gupta & Govindarajan, 2000). Benefits must outweigh the costs, and more often than not, questions about the profitability of the strategic undertaking take many years to answer. Lu & Beamish (2004) posited that organizational performance formed an S-curve over three phases of international expansion. They characterized these three phases as the initial phase, increasing levels of geographic scope, and a network of extensive foreign subsidiaries with operations in more and more countries. The authors found support for the S-curve over the three phases, and suggested that attribution of performance outcomes needs to consider more than the simply the selected geographic diversification strategy. Their findings suggest that performance relates to the appropriateness of the organizational form given the stage of organizational development. 15

16 Stage theories have been proposed by several researchers, suggesting that international diversification (and correspondingly organizational form) occurs with the passage of time (Johanson & Vahlne, 1977). However, recently McNaughton (2003) demonstrated that time lag was not a predictor of diversification, finding support for entrepreneurial theories of born global companies that begin as internationally diverse organizations or become so shortly after founding (Bell, 1995; McDougall, Shane, & Oviatt, 1994). In their original formulation of the typology for these international new ventures, Oviatt and McDougall (1994) suggest that while entrepreneurs may expand through limited diversification of value chain activities, primarily export-related, it is less common for entrepreneurs to found global start-ups that stretch their resources across a broad range of value chain components in diverse foreign markets. These researchers conclude, however, that if entrepreneurs are able to establish more diverse organizational forms they are more likely to develop sustainable advantages. The Transnationality Index offers a method to empirically analyze these conflicting predictions of the dynamics of internationalization. If stage theories are correct, we would expect to see both fewer entrepreneurial organizations than established firms with high TI scores, and that the TI score of well established global and transnational firms would have increased in somewhat consistent fashion over the course of their development. Alternatively, if the born global or similar theories of discontinuous change are correct we would expect to find significant numbers of global and transnational firms which achieved high TI scores rapidly or without utilizing organizational forms having lower TI scores earlier in their history. Finally, we may test Oviatt and McDougall s hypothesis of sustainable advantage by regressing performance over time with TI score to see if organizations achieving higher levels of diversification are more sustainable. Similarly, the Transnationality Index may be used to evaluate the many theories of comparative performance associated with researchers who show preference for a particular organizational form over another under certain market conditions. The TI score can enable entrepreneurial researchers to address what Zahra and George (2002:265) found to be a glaring deficiency in past research [which] is ignoring the internationalization of a firm s value chain or inputs in the production process. The 16

17 Transnationality Index also provides researchers of organizational strategy with a measure of competitive scope, defined as the breadth of activities the firm performs in competing in an industry (Porter, 1986). TI scores for an organization are a measure of strategic configuration and coordination of value chain assets and therefore enable researchers to empirically analyze which configurations are most effective under varying industry structure and market conditions. We hope that the Transnationality Index may provide researchers with a standard method for determining the strategic position and comparability of organizations. We believe this method is needed to clarify a frequent source of misspecification of empirical models in the field of international business studies. The Transnationality Index may also enable both researchers and practitioners to study new forms of international diversification such as the outsourcing multinational that has recently arisen as a result of globalization trends. Finally, we believe that the Transnationality Index will enable reframing of long-standing theories of international entrepreneurship and diversification which have received mixed support in the literature. With a clear understanding of the demarcation of organizational forms, a substantial source of error in empirical studies should be removed and the predictive validity of these models should significantly improve. 17

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