Effect of product and geographic diversification on company performance: Evidence during an economic crisis

Based on a novel sample of Spanish listed companies from nonfinancial sectors, we explore the effect of product and geographic diversification on company performance during an economic downturn. The study develops comprehensive models to understand the interaction effect of both strategies on company performance. We find a U-shaped geographic diversification–performance relationship and no evidence of a positive effect from product diversification, unless combined with high levels of geographic diversification. The results show that companies improved their performance by combining these strategies. The results are robust after controlling for the endogeneity of both types of diversification. Our findings highlight that geographic diversification is an effective and valuable strategy in economic downturns. Furthermore, this study confirms the importance of the interaction between product and geographic diversification to determine the total effect of product or geographic diversification on company performance.     

The effects of international diversification on the link between product diversification and performance in a boom and bust cycle: Evidence from Spanish firms (1994–2014)

This study examines the individual effects of product diversification on performance and the moderating effects of international diversification on the product diversification–performance link in the context of a boom and bust cycle. Most prior research on firm strategies largely neglect the business cycle. We use data on a large sample of Spanish manufacturing firms from 1994 to 2014. In this period, the Spanish economy experienced a boom period (1994–2008) and a bust period involving a severe economic crisis (2009–2014). Our study highlights the important role of each stage of the economic cycle. Specifically, with respect to product diversification, our findings show that in a boom, moderate diversifiers obtain better profitability levels than their highly diverse or limited diversification counterparts do. In contrast, during an economic downturn, moderate and high diversifiers can be equally effective up to some point of optimization. Our findings also reveal a negative and significant effect of internationalization on profitability, independent of the stage of the economic cycle. Product and international diversification are complementary strategies during a period of economic growth when firms opt for moderate levels of product diversification. Meanwhile, when firms choose high levels of product diversification, both types of strategies are complementary during the boom cycle, but substitutive during the bust cycle.     

Potential gains from specialization and diversification further to the reorganization of activities

In economic activities, two main forces guide firm and market structures: specialization and diversification. This paper provides new insights on this topic. We propose measuring gains due to simulated division and/or merger processes of firms. Potential gains come from a reorganization of activities through specialization/diversification and/or size effects. From a database of French farms, our findings demonstrate that even if both processes are beneficial for farming systems, the division gains outweigh the gains obtained by a merger. Moreover, mix changes are more important following a division than following a merger, implying more specialization gains than diversification gains.     

Service diversification and growth of professional service firms

This study investigates the impact of service diversification on the rate and mode of firm growth in professional service firms (PSFs). Drawing on the extant PSF literature, we identify differing views regarding the growth impact of service diversification. Specifically, some scholars suggest that the external client benefits associated with service diversification should allow PSFs to expand revenues at a rapid pace and pursue less merger and acquisition activity, whereas others imply that increased diversification can cause internal challenges with respect to learning costs, coordination and innovation that can limit the rate of revenue growth and encourage more mergers and acquisitions. We test these competing views using longitudinal data on 137 accounting firms and cross-sectional data on 125 law firms and find that service diversification is negatively associated with the rate of firm revenue growth and positively associated with the use of mergers and acquisitions.     

International diversification and the market value of new product introduction

Although previous studies on international diversification are plentiful, they mainly focus on the effect of international diversification on overall firm performance, and the results are mixed. This study extends this line of research and explores the impact of international diversification on new product performance. Specifically, we ask if international diversification explains the stock market reactions to new product introduction (NPI) announcements. We find an inverted-U-shaped relationship between international diversification and the announcement returns of NPIs, revealing that the market value of NPIs initially improves and then declines with increasing international diversification. The results also show that intangible assets, such as technological and marketing capabilities, positively moderate the relationship between international diversification and the market value of NPIs. Our study not only highlights the importance of considering both sides of international diversification in affecting investors' assessments of corporate new product strategies, but also shows the possibility of internal capabilities in changing the fixed relationship between international diversification and the market value of new products.     

Product diversification through licensing: Empirical evidence from Chinese firms

Anecdotal evidence suggests that manufacturing firms are able to engage in product diversification through external technology acquisitions, such as technology licensing. However, there is little empirical evidence regarding this proposition to link inward technology licensing and firms’ product diversification or to suggest when and under what conditions the effect of diversification through this channel may be mitigated or augmented. The current study aims to address this research gap through an empirical investigation of a sample of 141 Chinese manufacturing licensee firms. The results indicate that inward technology licensing is positively related to a firm’s diversification and that this relationship is further moderated by a licensee firm’s R&D expenditure and technological distance relative to the licensor firm.     

Intra-industry diversification effects under firm-specific contingencies on the demand side

How do firm-specific, demand-related factors influence the relationship between intra-industry diversification (IID) and performance? Recent findings regarding the performance effects of IID depict a complex picture with curvilinear relationships and several contingencies. However, firm-specific contingencies on the demand side have remained unexplored. We analyze how IID relates to firm performance (market share) in the German automotive industry using panel data between 1999 and 2008. We specifically focus on a firm's high-quality brand image as a demand-side contingency. We find support for our hypotheses of complex curvilinear relationships as well as for moderating effects of brand quality. Our results have significant theoretical implications for the IID literature.     

International diversification and performance: A study of global law firms

This paper is an exploration of the internationalization-performance relationship in the context of contemporary knowledge intensive services. After background literature, we build theory in the context of service firms to explain how performance in international diversification largely depends on building various relevant organizational competencies. We develop two hypotheses: one concerning a reverse u-shaped internationalization-performance function for these firms in general, and another differentiating between U.S. and U.K. firms. Data on 76 U.S. and 13 U.K. firms are analyzed using hierarchical regression. The findings sustain the reverse u-shaped internationalization-performance relationship for these firms in general, but also suggest that the prospects are quite different for U.S. versus U.K. firms. Our findings add to an emerging stream of research that indicates a resolution to the hitherto ambiguous internationalization-performance relationship; and we also suggest a convergence between findings in capital-intensive and knowledge-intensive industries. The paper concludes with some implications for practitioners.     

CEO-COB prestige distance and change in diversification: Exploring a curvilinear relationship

This study investigates how the prestige distance between a new chief executive officer (CEO) and the chairperson of the board (COB) can influence changes in the firm’s level of diversification. We draw on social comparison theory and activity theory to argue that the prestige distance between a CEO and COB alters the interaction and communication between the two leaders, and accordingly influences the firm’s ability to change its diversification posture. We test our hypotheses on a dataset of 135 firms and find that the prestige distance in CEO-COB dyads has a U-shaped relationship with the change in the firm’s level of diversification. Our results reveal that low CEO-COB prestige distance, and to a lesser extent high CEO-COB prestige distance, creates conditions for greater changes in the firm’s level of diversification. Further, we find that this U-shaped relationship is more pronounced when the CEO-COB dyad has greater age differences and flattens when the dyad shares age similarity.     

基于波动持续性的最优组合构建与分散化研究

构建恰当资产组合来减少风险, 是投资组合理论研究的重要目标.由于金融时间序列的波动往往会伴随着持续性特征, 该种特性会增大组合未来收益的风险.本文通过构建随机波动模型序列持续性最优投资组合模型, 以降低金融资产波动的持续性特征对组合收益波动的影响;并通过研究其分散化水平, 考察该投资组合构建方法的有效性与稳健性.研究发现:与均值方差的组合模型相比较, 序列持续性组合的风险分散化水平更好.此研究在资产组合选择方面, 具有较为重要的理论价值及实践意义.     

Product diversification strategy and financial performance: meta-analytic evidence on causality and construct multidimensionality

We meta-analytically integrate empirical data from 104 studies published between 1970 and 2005 and test whether the popular proposition that diversification strategy impacts financial performance holds after controlling for the difference between correlational estimates that indicate mere association and such that allow for inferring causation. Drawing on a total sample size of 82,742 observations, we find that temporal sequence of variable measurement and multidimensionality of both diversification and performance construct strongly influence the nature of the linkage observed in empirical research. Meta-analytic results suggest that strategies of related and unrelated diversification are significantly associated with concurrent but not with subsequent accounting- and market-based performance. Most importantly, we find that there is no such thing as a universally valid nature of the diversification strategy–performance linkage. Drawing on a quantitative integration of the relevant literature of unprecedented scope and detail, our findings challenge earlier meta-analytic results and contemporary theory on the performance effects of diversification strategy. Our study also has important implications for measurement designs of future diversification–performance research.     

To fit in or stand out? How optimal distinctiveness in technological diversification affects firm performance

Previous research has observed technological diversification from a strategic viewpoint and regarded it as a strategy used by firms to differentiate themselves from competitors. This perspective, however, overlooks the fact that firms' strategies can also be understood as conformity to institutional pressure to gain legitimacy. In order to study the technological diversification–firm performance relationship from a more comprehensive viewpoint, this paper starts from a strategic balance perspective and investigates how technological diversification conformity enhances firm performance. Using a unique dataset of Chinese listed firms' patenting activities from 2003 to 2014 and adopting ordinary least squares (OLS) regression, we produce empirical findings that reveal a curvilinear (inverted U-shaped) relationship between firms’ conformity in technological diversification and their performance. Our results further delineate the boundary conditions that influence this relationship. We find that firm age positively moderates the relationship, that is the conformity-performance relationship is steeper with the older firms. Moreover, the result suggests that state ownership negatively moderates the relationship, that is, the relationship is flatter when firms are controlled by the state.     

The Impact of Stakeholder Management on Corporate International Diversification

This article explores the relationship between stakeholder management and international diversification. We differentiate between strengths and concerns in stakeholder management to demonstrate the differential effects of the two aspects of stakeholder management. Previous research on stakeholder theory often focuses on the importance of stakeholder relations, trying to build a business case of relational capital that results from strong stakeholder management. Such a relational approach, however, overlooks the process of managing stakeholders, a process that allows firms with strengths in stakeholder management to develop an important capability of managing tensions. In this study, we argue that this capability, an inherent part of stakeholder management, can be critical when firms face increased complexity during the process of international diversification. We therefore propose that strengths in stakeholder management are positively related to international diversification, while concerns in stakeholder management are negatively related to international diversification. Using panel data for 169 US multinational firms over a 10‐year period, we find support that strengths in stakeholder management facilitate international diversification. We discuss the contributions of our findings to stakeholder theory and international business research.     

Agency conflict in diversified business groups and performance of affiliated firms in India: Contingent effect of external constraint and internal governance

This study examines how diversification in Indian business groups creates multiple forms of agency problems and has performance implications for group-affiliated firms. Departing from prior literature which emphasizes the principal–principal agency conflict in business groups, we argue that business group diversification leads to dual agency problems between controlling and minority shareholders (principal–principal) and shareholders and managers (principal–agent) in affiliated firms. Both these agency problems arise in diversified business groups through cross-subsidization of affiliated firms by inefficient capital investment, continuing presence of affiliated firms in declining industries, tunneling of resources from profitable affiliated firms, lack of attention by business group headquarters to affiliated firms, and affiliated firm managers' sense of perceived security, which negatively impacts affiliated firms’ performance. These agency issues are reduced with the increase in product market competition from exposure to international markets and through concentrated promoter ownership in the affiliated firms. Our hypothesized model finds empirical support in a sample of 828 business group–affiliated firms in India.     

Host-country Headquarters of U.S. Firms in China: An Empirical Study

Recent studies show that large multinational enterprises (MNEs) adopt an organizational unit, called host-country headquarters (HCHQ), in key foreign countries (Ma and Delios, 2010; Ma, Delios and Lau, 2013). In this study, we examine the factors that are associated with the establishment of an HCHQ by US firms in China. We hypothesize that an HCHQ is associated with both firm-specific factors and host country-specific factors. We find that an HCHQ is associated with the firm's scope diversification and degree of internationalization, and the strategic importance of foreign host country and subsidiary diversification in that host country. The findings are based on archival data of U.S. Fortune 500 firms. The findings add to the understanding of an important organizational structure of large U.S. firms in China, and possibly to MNE structures more widely in key foreign countries.     

All the bottles in one basket? Evaluating the effect of intra-industry diversification on risk

This paper develops a framework using Monte Carlo simulation to examine risk/return properties of intra-industry product portfolio composition and diversification. We use product-level data covering all Swedish sales of alcoholic beverages to describe the risk profiles of wholesalers and how they are affected by actual and hypothetical changes to product portfolios. Using a large number of counterfactual portfolios we quantify the diversification benefits of different product portfolio compositions. In this market the most important reductions in variability come from focusing on domestic products and from focusing on product categories that have low variability. The number of products also has a large effect in the simulations, moving from a portfolio of 10 products to one of 20 products cuts standard deviation of cash flows in relation to mean cash flows by more than half. The concentration of import origins plays a minor quantitative role on risk/return profiles in this market.     

Corporate Political Activity and Firm Performance: The Moderating Effects of International and Product Diversification

Prior research has found that corporate political activity (CPA) can both positively and negatively impact firm performance. Combining agency theory with the resource-based view, we examine the relationship between domestic lobbying (a key form of CPA) and firm performance by explicating the moderating effects of international and product diversification. We argue that expansion into international and product markets increases a firm's resources and reduces agency costs in domestic lobbying. Our results, based on a sample of 737 firms, show that lobbying is positively associated with performance for firms that are diversified in both international markets and along product-lines; whereas lobbying is counter-productive for purely domestic and undiversified firms. Our results contribute to the literature on the firm performance implications of corporate political activity by highlighting the roles of international and product diversification.     

Ownership Identity and Concentration: A Study of their Joint Impact on Corporate Diversification

This paper examines the impact of ownership on product and international diversification. While ownership concentration has received considerable attention from agency theorists we argue that a more nuanced analysis is necessary. We consider how the identity of owners moderates the impact of ownership concentration on diversification strategies. We develop a framework that explains how the combination of different motivations, resources and capabilities associated with different types of owners results in significantly variable relationships between ownership concentration and both product and international diversification. From a theoretical perspective this suggests a social contextualization and extension of the agency theoretic approach that characterizes the field. Based on a study of 222 European firms between 1994 and 2007 we show that family ownership concentration has a positive impact on product and a negative impact on international diversification while the impact of institutional and state ownership concentration is negative on product diversification and positive on international diversification compared with family ownership. This is the first study to provide a comprehensive framework explaining how ownership concentration and identity interact and affect both international and product diversification.     

Strategic Sourcing in the Presence of Uncertain Supply and Retail Competition

This study develops an analytical model to evaluate competing retail firms' sourcing strategies in the presence of supply uncertainty. We consider a common supplier that sells its uncertain supply to two downstream retail firms engaging in price competition in a horizontally differentiated product market. The focal firm has a dual‐sourcing option, while the rival firm can only source from the common supplier. We assess the system‐wide effects of supply uncertainty on the focal firm's incentive to pursue the dual‐sourcing strategy. We find that the focal firm's dual‐sourcing strategy can create a win–win situation that leads to increased retail prices and expected profits for both firms. Furthermore, under certain conditions, we show that it is beneficial for the focal firm to strategically source from the common supplier, even if its alternative supplier offers a lower wholesale price. Overall, we identify two types of incentives for adopting the dual‐sourcing strategy: the incentive of mitigating supply risk through supplier diversification and the incentive of strategic sourcing for more effective retail competition.     

信息不对称与服务企业多元化程度及其绩效关系研究

以57家中国服务企业为样本,通过均值比较和回归分析研究了信息不对称同服务型企业多元化程度,以及多元化程度与服务型企业绩效之间的关系。研究发现,在服务企业中,经验服务业的多元化程度高于搜索服务业的多元化程度;服务企业的经营绩效与多元化程度呈正相关关系。