Academic journal article Management International Review

The Effect of International Diversification Strategy on the Performance of Spanish -- Based Firms during the Period 1991 - 1995 (1)

Academic journal article Management International Review

The Effect of International Diversification Strategy on the Performance of Spanish -- Based Firms during the Period 1991 - 1995 (1)

Article excerpt

Abstract

* This paper examines the relationship between international diversification and Spanish firm performance during the period 1991-1995. International diversification is measured in two ways, the Global Market Diversification index and the geographical market diversification categories constructed from Varadarajan's product diversification measure adapted to the international case. Performance is measured using accounting (profitability and its variability) and market value (Tobin's q) variables.

Key Results

* We find a positive relationship between economic performance and international diversification, but only when performance is measured by way of Tobin's q. However, the fact that diversification is related or unrelated, as this is measured in the paper, does not affect economic performance.

Introduction

During the last thirty years, the study of the relationship or effect of diversification strategy on firm performance has generated considerable interest in the area of strategy. In particular, the work of Rumelt (1974) began a line of research that has subsequently been followed by numerous researchers. The first studies on this topic were concentrated solely on product diversification. More recently, a large number of researchers, influenced by the literature on product diversification, have considered internationalization as an international diversification strategy, defining it as expansion across the borders of global regions and countries into different geographic locations or markets (Hitt/Hoskisson/Ireland 1994, Hitt/Hoskisson/Kim 1997). The choice of international diversification strategy has been motivated both by the search for new opportunities for the firm and by changes in the environment. These changes have caused the opening of new markets and accelerated their globalization. In this way, sectors of local or multidomestic competition have become sectors of global competition.

International markets and, therefore, the operations associated with them, present firms with new opportunities. However, at the same time, they confront firms with new competitive challenges and greater local and international competition (Hitt/Hoskisson/Kim 1997). This situation explains the growing interest in analyzing the implications of this diversification strategy on performance. There is at least some degree of agreement in the literature that international diversification strategy has a positive effect on corporate performance (3). Having said that, there are some studies, albeit fewer, which find either no significant differences in the performance of domestic and multinational firms (4), or even a negative effect (5).

Most of these studies have focused on firms from leading developed countries and the evidence on this relationship for more recently developed countries does not yet exist. These latter countries have a significant growth potential, and therefore it would be interesting to analyze the effect of international diversification strategy on their performance.

The objective of this paper is to determine the relationship between international diversification strategy and the performance of Spanish firms, on the basis of a sample of non-financial firms quoted on the Spanish Stock Market during the period 1991-1995; that is to say, we try to establish a first approximation to the state of the relationship that exists between the diversification strategies and the performance of Spanish firms. Although some previous research exists on the topic of the internationalization of Spanish firms, this is the first paper that examines its effects on economic performance.

This paper has two principal differences with respect to previous studies, which make reference to the way the variables are measured. First, we use two measurements of international diversification: a continuous index that has been used before, and a second, non-lineal measurement, that allows us to classify firms into categories with different degrees of international diversification and which shows the direction of the international expansion (6). …

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