Academic journal article Management International Review

Corporate Diversification, TMT Experience, and Performance: Evidence from German SMEs

Academic journal article Management International Review

Corporate Diversification, TMT Experience, and Performance: Evidence from German SMEs

Article excerpt

Abstract:

* We investigate the effect of product diversity and geographic diversity on the performance of SMEs, using an integration of the upper echelons literature with the product and geographic diversification literature.

* We propose an inverted U shaped relationship between product (geographic) diversification (PD/GD) and the performance of SMEs. We also propose that effect of PD and GD is contingent on one another and the TMT experience.

* We find that both PD and GD have an inverted U shaped relationship with the SME performance. Further, PD and GD interact positively to enhance each other's value in affecting firm performance. TMT experience also enhances the value of PD and GD for firm performance.

Keywords: Product diversification * Geographic diversification * Top management teams * SMEs * Performance * Germany

Introduction

Diversification-performance relationship is a widely explored research question in strategic management and international business. Over the years, scholars have accumulated empirical findings as well as theoretical arguments for varying nature of diversification-performance relationship, both across time and countries (Khanna and Rivkin 2001; Lu and Beamish 2004; Mayer and Whittington 2003). In spite of a vast body of literature investigating the impact of product and geographic diversification on firm performance, there are still many unanswered questions, keeping scholars interested in continuing with this line of inquiry (Chakrabarti et al. 2007; Mayer and Whittington 2003; Wiersema and Bowen 2008).

There are two dimensions on which the diversification-performance research has advanced in recent years. First, scholars have attempted to establish the cross-country validity (Lu and Beamish 2004; Mayer and Whittington 2003) of the theoretical arguments and empirical findings obtained mainly in the US context. These cross-country investigations have revealed many interesting findings (e.g. Lu and Beamish 2004) and advanced the theory development (Khanna and Rivkin 2001). Second, scholars have shifted focus from simply investigating the diversification-performance relationship, to identifying the contingency factors on which this relationship may be dependent (Chakrabarti et al. 2007).

We design the current study on the above two dimensions, utilizing a novel empirical context, and identifying important contingency factors for diversification-performance relationship. Using a unique panel database of small and medium sized enterprises (SMEs) in Germany, we investigate how the product diversification (PD) and geographic diversification (GD) individually and jointly affect the performance of SMEs. We further argue that, given the top management team (TMT) plays a very crucial role in the case of SMEs (Autio 2000; Oviatt and McDougall 1994; Reuber and Fischer 1997, 2002), the relationship between product/geographic diversification and performance should be contingent upon the TMT experience. We develop our arguments utilizing the literature on PD (Mayer and Whittington 2003), GD (Lu and Beamish 2004; Tallman and Li 1996), and the upper echelons perspective (Finkelstein and Hambrick 1996; Hambrick and Mason 1984).

In our study design, we follow the principal of replicative extension (Singh et al. 2003), by using the existing methodological frameworks, while extending it to a new empirical context, and establishing the importance of new contingency factors. In doing so, this study contributes to the literature in three ways. First, we contribute to the PD and GD literature by providing empirical findings for German SMEs, a context largely unexplored in literature. Second, we establish how PD and GD might affect each other's value for firm performance. Much of the extant literature conceptualizes the costs and benefits of PD and GD on standalone basis, without due consideration to how one might affect the other (see Hitt et al. …

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