Academic journal article Management International Review

The Combined Effect of International Diversification and Product Diversification Strategies on the Performance of U.S.-Based Multinational Corporations

Academic journal article Management International Review

The Combined Effect of International Diversification and Product Diversification Strategies on the Performance of U.S.-Based Multinational Corporations

Article excerpt


The topic of diversification has become a dominant stream of research in the strategic management literature. Spurred by Rumelt's (1974) seminal work on corporate diversification a debate has raged on as to whether related diversified firms perform better than unrelated diversified ones. On the other hand, scholars in international business have wrestled with questions of domestic versus international diversification and the strategy-structure fit moderated by the degree of international involvement (Daniels, Pitts and Tretter 1985). These two streams of research have progressed relatively in isolation except in a few cases. A few studies recently have attempted to combine the product and market dimensions of global operations and their relationship to corporate performance (Buhner 1987, Geringer, Beamish, and da Costa 1989, Kim, Hawang, and Burgers 1989).

The present study examines the industry adjusted performance of U.S. multinational corporations (MNCs) as it relates to several measures of product diversification and international (market) diversification. The paper is organized as follows. The first section is a review of the literature on product diversification and international diversification. In the second section some hypotheses are proposed. Third, the methodology is explained. Finally, a discussion of the results and findings is presented.

Literature Review

Product Diversification

In his benchmark study, Rumelt (1974) defined diversification as an "entry into a new product market activity that requires or implies an appreciable increase in the available managerial competence within the firm" (p. 10). Reaching out into new areas requires the development of new competencies or the augmentation of existing ones. Studies by Bettis (1981), Rumelt (1982), Palepu (1985), Suzuki (1980), and Varadarajan and Ramanujam (1987) have supported Rumelt's (1974) findings that related diversifiers outperform unrelated diversifiers. However, other studies report no differences (Grant and Jammine 1988, Melicher and Rush 1973) or the opposite (Luffman and Reed 1984, Michel and Shaked 1984). One of the reasons for the mixed findings of the product diversification research may be that the international diversification component has been neglected or ignored by strategy scholars (Hitt, Hoskisson, and Ireland 1994). Detailed literature reviews on product diversification have been recently published (Hoskisson and Hitt 1990, Ramanujam and Varadarajan 1989) and hence will not be repeated here.

International Diversification

Several researchers have reported that firms that diversify internationally perform better than those which do not. Bergsten, Horst, and Moran (1978) found that firms which had more foreign direct investment had higher profits during 1965-1971. Leftwich (1974) found that MNCs perform better than domestic firms in terms of profits. Miller and Pras (1980) studied 246 major U.S. corporations for the years 1961, 1965, and 1968 and found international diversification to be significantly related to corporate profit stability compared to product diversification and exporting. Buhner (1987) showed international diversification was significantly and positively associated with performance in 40 large West German firms. In a sample of 304 British MNCs, Grant (1987) demonstrated that profitability was strongly associated with international diversity.

Product and International Diversification

A number of empirical studies have examined both product and international dimensions of strategy (see Table 1). In his study of 95 U.S. industries, Wolf (1977) found that the manufacturing firms most likely to operate on a multinational and multi-industry basis are large and have strong technical capabilities. In analyzing time series production index data of three industries in four major industrial countries, Madura and Rose (1987) found that manufacturing firms could reduce their risk exposure by diversifying internationally in their specialized field. …

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