Product Diversification, Ownership Structure, and Subsidiary Performance in China's Dynamic Market

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Abstract

* Previous studies on international expansion have treated diversification and ownership strategies separately as independent specialties. We argue instead that product diversification and ownership structure are highly interrelated strategic issues which have strong performance implications both independently and collectively.

* While emerging markets are indeed presenting tremendous business opportunities in numerous industries boosted by huge market demands released from ideological governmental control, the related diversification is superior to the unrelated one in maximizing economic benefits there. The competitive advantage notion seems to be more advisable than what portfolio-based theorists have suggested for most MNCs.

Key Results

* This study finds that subsidiaries pursuing a related diversification strategy with parents and taking a majority position perform better in terms of sales growth and profitability than those following an unrelated diversification strategy and maintaining minority, split, or full ownership. Majority ownership further facilitates the positive effect of related diversification on subsidiary performance. Globalization has become a permanent and irreversible part of economic life. Over the past decade or so, competition has been fundamentally altered by increasing technological advancements and the globalization of business. The need to balance the tensions between many dynamic forces (geographic, product, market, and technological) has resulted in firms extending their presences all over the globe for a multitude of purposes and through a multitude of forms (Dunning 1988, Bartlett/Ghoshal 1989). Consequently, international expansion decisions and strategies have acquired increased strategic significance (Kim/Hwang/Burgers, 1993).

Product diversification and ownership structure are two important decisions made during the international expansion process. Product diversification, that is, the pattern and extent by which a firm's different lines of businesses or industries are linked, affects the path of product and market development and thus influences organizational evolution. When expanding internationally, product diversification creates more opportunities as well as more challenges for multinational corporations (MNCs) than domestic businesses (Geringer/Beamish/da Costa 1989). Thus, it is often associated with both high returns and high risks (Kim et al. 1993). Ownership structure, on the other hand, is a critical issue with strong implications for risk sharing, resource allocation, knowledge commitment, and organizational control (Gatignon/Anderson 1988, Gomes-Casseres 1990, Hennart 1988). These in turn may influence subsidiary performance and the fulfillment of MNC goals (Beamish/Banks 1987, Makino/Beamish 1998).

Compared to global geographical (market) diversification, which has been vigorously addressed (e.g. Geringer et. al. 1989, Hoskisson/Hitt 1990, Kim et. al. 1992, 1993), international product diversification (particularly its performance effect at the subsidiary level) has not been paid adequate attention. It is nevertheless an important research issue because unabated technological advancement and fierce global competition increase the importance of product diversification and necessitate its alignment with external dynamics and organizational contingencies. Moreover, previous studies on international expansion have treated diversification and ownership strategies separately as independent specialties. We argue instead that product diversification and ownership structure are highly interrelated strategic issues which have strong performance implications both independently and collectively. Specifically, we propose and attempt to show that there is a stronger positive relationship between related diversification and subsidiary performance when ownership level is higher.

The performance implications of diversification and ownership are always context-specific (Christensen/Montgomery 1981, Woodock/Beamish/Makino 1994). …