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In Press - AMJ
HOME COUNTRY ENVIRONMENTS,CORPORATE DIVERSIFICATION STRATEGIES,
AND FIRM PERFORMANCE
William P. WanThunderbird
Global Business Department15249 N. 59th Ave
Glendale, AZ 85306-6000Phone: (602) 978-7395Fax: (602) 843-6143
E-mail: [email protected]
Robert E. HoskissonUniversity of Oklahoma
Michael F. Price College of BusinessManagement Division
Norman, OK 73019-4006Phone: (405) 325-3982Fax: (405) 325-1957
E-mail: [email protected]
_______________
The authors would like to thank Bert Cannella, Javier Gimeno, Dan Wood, Daphne Yiu, Laszlo Tihanyi, AmyHillman, Associate Editor Harry Barkema, and the three anonymous reviewers for their valuable comments duringvarious phases of this research. The first author acknowledges the financial support provided by the Center ofInternational Business Studies at Texas A&M University.
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HOME COUNTRY ENVIRONMENTS,CORPORATE DIVERSIFICATION STRATEGIES,
AND FIRM PERFORMANCE
ABSTRACT
This study reexamines the relationships between corporate diversification strategies and firm
performance and suggests that these relationships are related to home country environments. We
examined two environmental aspects: factors which facilitate transformational activities and
institutions which foster transactional activities. Using a sample of firms from six Western
European countries, we found support for the paper’s central proposition that home country
environment is an important component in the study of corporate diversification strategies.
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Research on corporate diversification has made significant contribution to the field of
strategic management in the past decades (Hoskisson & Hitt, 1990). With few exceptions,
however, most prior studies have assumed away the country environmental differences in which
the diversification strategies are adopted. In product diversification research, recent theories and
empirical studies are mostly grounded in the corporate refocusing, or downscoping, experiences
of the United States in the past two decades (Hoskisson & Hitt, 1994). However, there is
evidence that even firms in the United States might have benefited from unrelated diversification
in the 1960s when conglomerates enjoyed efficient internal capital markets in the absence of a
matured external capital market (Hubbard & Palia, 1999). Such benefits began to diminish in the
1970s along with economic and regulatory improvements in the 1970s and 1980s (Markides,
1992). Contextual differences become even more salient when we attempt to apply extant
theories and findings across countries. For example, diversified business conglomerates have
dominated many economies throughout the world (Khanna & Palepu, 1997), while in the United
States they have decreased as a significant form. As such, our knowledge about the product
diversification strategies pursued by firms in other countries is limited.
More recently, the topic of international diversification has also captured the attention of
corporate diversification researchers (e.g., Hitt, Hoskisson, & Kim, 1997; Tallman & Li, 1996).
Despite its significant contribution, this line of research likewise has its theoretical and empirical
focus predominantly centered on firms located in a few countries, mainly the United States or
Japan, and seldom examined firms located in other countries (Tallman & Shenkar, 1990).
Although extant research has generally supported a positive relationship between international
diversification and performance (e.g., Geringer, Beamish, & daCosta, 1989; Hitt et al., 1997), the
applicability of such theoretical arguments and findings across countries has yet to be adequately
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examined in the diversification literature. More research is necessary to illuminate if firms
located in different country environments can also benefit from international diversification.
The focus of this study is to explore how country-level environmental contexts affect the
relationships between corporate diversification strategies and firm performance. Primarily
drawing upon arguments developed in institutional economics (e.g., Clague, 1997; North, 1990),
we seek to reexamine the relationships between corporate diversification strategies and firm
performance between dissimilar types of home country environments. Hirsch and Lounsbury
(1996) advocated, in general, the use of institutional economics in studying organizational
differences and our research meets this request. This study advances the current theories of
corporate diversification by explicitly incorporating the importance of home country
environmental contexts and recognizing that different contexts embody diverse levels of
environmental munificence (Castrogiovanni, 1991; Dess & Beard, 1984). In this study, we define
munificence in terms of more tangible production factors, such as physical infrastructure,
available to firms (labeled factors) and less tangible institutional support, such as judiciary
efficiency, which facilitates transactions (labeled institutions). Firms draw on their home country
environments’ factors and institutions to help produce goods or services and to exchange inputs
and outputs with others. We reconceptualize various corporate diversification strategies as
strategic actions to facilitate the substitution or utilization of factors and institutions for
enhancing firms’ competitive advantages. Accordingly, we suggest that certain diversification
strategies are more likely to be associated with superior performance in certain home country
environments. By bringing home country environment to the foreground, this study extends the
corporate diversification literature by providing a fresh approach to understand various corporate
diversification strategies from a comparative country environmental perspective. Furthermore,
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our study contributes to the corporate diversification literature by explaining the performance
implications of both product and international diversification strategies largely conceptualized
from an institutional economics perspective (North, 1990). More specifically, by juxtaposing
product and international diversification strategies, premised on a common set of rationales
within an integrative conceptual framework, our study seeks to provide an explanation for the
apparent “paradoxical” relationship between corporate diversification strategies and firm
performance across dissimilar home country environments (e.g., Geringer et al., 2000).
We tested our conceptual framework on a sample of firms from six Western European
countries. Western Europe represents a new setting for extending the knowledge of corporate
diversification beyond the traditional country environmental contexts. Although Western
European countries are, for the most part, developed countries, there are persistent, notable
variations in the degrees of economic success and socio-political developments among them,
allowing us to examine the hypothesized performance differences of diversification strategies
due to country-level environmental munificence dissimilarity. Also, focusing on Western Europe
minimizes a host of undue exogenous influences, such as regional economic shocks or remote
geographic locations that limit international diversification, thereby enabling us to interpret the
findings more clearly within the framework of country environmental context variation.
HOME COUNTRY ENVIRONMENTS
Over the decades, it has been widely accepted that differences in economic prosperity
between countries are largely attributable to differential amounts of production factors
(Hirschman, 1983). Institutional economists, most notably North (1990), contend that without
the institutions, or “the rules of the game,” that prescribe a country’s incentive structure and
economic specialization, complex inter-firm transactions would become too costly to complete
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and business dealings would be restricted to known parties (Clague, 1997; Greif, 1993). North’s
(1990) approach, although sharing with Williamson’s (1975) perspective in the importance of
transactions, emphasizes the central role of the larger environment in constraining the relative
optimality of firms’ actions. Hirsch & Lounsbury state that North “conceived long-run economic
change as the accretion of innumerable short-run decisions by political and economic
entrepreneurs acting in an interested way, but whose individual choices reflect their subjective
modeling of the environment” (1996: 872). The environment’s opportunity set is determined by
production factors and institutions and firms seek to capture profitable opportunities defined by
the opportunity set (North, 1990). Because opportunity sets differ across countries, firm’s
optimal actions would accordingly diverge. In essence, an institutional economics perspective
recognizes that, in addition to the production factors traditionally emphasized in classical
economics, institutions represent important elements in influencing business activities (Clague,
1997; Eggertsson, 1990).
Premised on the insights from institutional economics, this study conceives home country
environments as consisting of factors and institutions. Factors are used to produce goods or
services (transformational activities) whereas institutions are for the exchange of inputs and
outputs with other firms (transactional activities). By and large, factors, which are comprised of
endowed, advanced, and human factors, are more tangible in nature. Endowed factors refer to the
endowments largely inherited from the natural environment. Countries that possess an abundant
supply of endowed factors are in a better position to create wealth. For example, in tracing the
industrial success of the United States, Wright (1990) highlights the importance of natural
resource abundance. Advanced factors generally refer to a country’s physical infrastructure,
capital goods accumulation, and financial resources. For example, the importance of physical
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infrastructure is shown by Aschauer’s (1989) study that productivity decline of the United States
in the 1970s was precipitated by declining rates in infrastructure investments. Human factors
refer to labor quality such as the population’s education attainment. Human factors help generate
innovative ideas and facilitate a country’s absorptive capacity with regard to new product ideas
and are found to relate to a country’s economic growth (Barro, 1991).
On the other hand, institutions, which refer to political, legal, and societal institutions, are
less tangible. Political institutions are primarily related to the credibility and effectiveness of the
bureaucratic infrastructure (Bergara, Henisz, & Spiller, 1998) and represent the foundation for
business transactions. Legal institutions spell out the formal rules whereby business transactions
may take place. In addition, the effectiveness of legal enforcement, such as the existence of an
efficient judiciary system, is equally important. Adequate legal institutions enable firms to
engage in complex transactions with anonymous parties, thus facilitating production
specialization (Greif, 1993). Societal institutions generally refer to a country’s general level of
trust, cooperative norms, and its intensity of associational activities (Knack & Keefer, 1997). For
example, Grief’s (1993) study shows that societies with higher levels of trust have enhanced
impersonal business transactions. Cooperative norms constrain self-interested economic actors to
work for collective benefits (Knack & Keefer, 1997). A dense network of civic associations,
such as cultural groups, helps nurture trust and cooperation in the society and instill in the
participants “habits of cooperation, solidarity, and public-spiritedness” (Putnam, 1993: 89-90).
In many respects, our conceptualization of home country environments parallels that of the
environmental munificence literature (e.g., Castrogiovanni, 1991; Dess & Beard, 1984). The
environment has long been viewed as providing firms with means for growth and competition
(Thompson, 1967). While environments can be conceptualized in many ways, environmental
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munificence is regarded as one of the most important aspects in explaining strategic behaviors
and outcomes (Castrogiovanni, 1991). Past studies in the munificence literature have found
environmental munificence as an important component influencing firm strategies and outcomes,
such as organizational structure, stakeholder satisfaction, organizational innovation, and
decision-making (e.g., Goll & Rasheed, 1997; Yasai-Ardekani, 1989). In focusing on the
capacity of factors and institutions at the macro environmental level, our study views
environmental munificence as the availability of crucial factors and institutions in the home
country environment. In this exploratory study, we maintain that the complex relationships
between diversification strategies and firm performance are critically determined by country-
level environmental munificence. In order to test our hypotheses in the least complicated way,
we distinguish only between more munificent and less munificent home country environments,
but not hybrid situations of more munificent factors but less munificent institutions and vice
versa. In the hypotheses that follow, we elaborate how the performance implications of firms’
diversification strategies are related to country-level environmental munificence.
HOME COUNTRY ENVIRONMENTS AND CORPORATE DIVERSIFICATION
Because the munificence level of home country environments differs, representing diverse
sets of opportunities and constraints for firms, the factors and institutions that firms need or can
utilize are likely to differ across such environments. Firms need factors and institutions for
successful competition. High levels of factors help upgrade firms’ value chains, thus expanding
the potential to achieve higher levels of transformational efficiency. In additional to production,
firms need to engage in business exchanges. High levels of institutions contribute to transactional
efficiency by allowing firms to conduct business with unfamiliar but more efficient parties
(Greif, 1993; North, 1990). Without sufficient institutions in place, firms would have to engage
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in tedious transactional processes such as contract negotiation or dispute resolution. To a
significant extent, firms’ actions and success are thus determined by country-level environmental
munificence in factors and institutions. In low levels of environmental munificence, firms would
maintain a significant competitive advantage over their competitors by pursuing strategic actions
that enable them to substitute those factors and institutions that are lacking in the home country
environment. In high levels of environmental munificence, firms would benefit from pursuing
strategic actions that allow them to fully utilize the factors and institutions available in the home
country environment for improving their competitiveness. As a departure from the extant
literature, we contend that it is at this point where various corporate diversification strategies
come into play in different home country environmental contexts. We reconceptualize various
diversification strategies as different strategic actions to substitute or utilize factors and
institutions for competition, in response to the home country environment’s opportunity set.
Viewed in this light, home country environment constitutes a crucial context whereby firms that
adopt the appropriate diversification strategies would achieve superior performance.
We examine how home country environments may influence the performance implications of
various corporate diversification strategies (product, outbound international, and inbound
international). Product diversification refers to a firm’s diversification into more than one
product market. With respect to international diversification, outbound international
diversification and inbound international diversification are distinguished. Outbound
international diversification refers to a firm’s diversification into foreign environments, either by
itself or by allying with other firms. Firms also cooperate with foreign firms without operating in
another country. Inbound international diversification refers to a firm’s international cooperative
activities for improving its business operations or its competitiveness at home. In the hypotheses
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that follow, we discuss the performance implications of various diversification strategies
between more munificent and less munificent home country environments.
Product Diversification
In more munificent home country environments, firms often enjoy a more abundant supply of
factors and institutions. Hence pursuing strategic actions to substitute factors and institutions is
much less beneficial. A healthy supply of institutions enables firms to enjoy specialization
benefits facilitated by the availability of market transaction mechanisms (Clague, 1997). For
example, adequate contract enforcement mechanisms increase firms’ willingness to deal with
efficient, albeit perhaps less familiar, transacting parties (Eggertsson, 1990). Well-developed
societal institutions such as cooperative norms and societal trust facilitate the ease of inter- and
intra-organizational cooperation (Putnam, 1993). Because firms are less concerned with
opportunistic behaviors, they are less restricted in the types and numbers of exchange partners,
thus allowing them to deal with the most efficient buyers or sellers (Greif, 1993). Efficient
capital allocation mechanisms, such as credit screening, are also in place to match capital owners
with efficient capital users. Stringent anti-trust enforcement and efficient government
bureaucracy promote fairer, more intense competition, ensuring a high degree of market
participation (Bergara et al., 1998; Knack & Keefer, 1997). Because abundant factors and
institutions provide firms with plenty of opportunities to constantly challenge one another’s
competitive positions and facilitate new market entry (Specht, 1992), giving rise to more intense
competition, firms are compelled to devote significant amounts of attention to increase product
competitiveness. As such, higher levels of product diversification, requiring managers to monitor
a wide variety of businesses, may deplete a substantial portion of managers’ information-
processing capacities, and, accordingly, represent a less desirable strategy (Hill & Hoskisson,
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1987). Corporate governance mechanisms, which are likely to be more prevalent, also
discourage empire building and lead firms to be more focused (Walsh & Seward, 1990).
In this light, the critical success factors in these environments would largely hinge on a firm’s
ability to best utilize the factors and institutions that are more readily available. With competitive
success primarily a function of transformational efficiency, firms would find it particularly
beneficial to pursue lower levels of product diversification to stay focused and attain more
specialized product market expertise. Because the sources of competitive advantage in these
environments rest on continuous improvements in the value chain, specialized capabilities in
certain transformational activities, leading to patents or consumer loyalty, constitute significant
barriers to entry. In this light, lower levels of product diversification, which place great emphasis
on developing unique, critical capabilities, are likely to lead to higher levels of firm performance.
Hypothesis 1a: In more munificent home country environments, product diversification isnegatively related to firm performance.
In less munificent environments where factors and institutions are lacking, firms would find
it beneficial to pursue higher levels of product diversification to create substitutes for factors and
institutions. A diversified corporate structure can create substitutes for lack of factors in the
environment. For instance, internal financial economies may compensate for inadequate external
capital markets, by allocating funds among internal business units more efficiently (Hill &
Hoskisson, 1987). Besides, higher levels of product diversification increase a firm’s overall
attractiveness as a borrower. Due to higher degrees of information asymmetry and more costly
default resolution procedures in these environments, lenders are prone to transact with large,
diversified firms to lower default risks. Moreover, although talents generally are in shorter
supply in these environments, diversified firms, because of their reputation and business scope,
can attract more talents and develop robust internal labor markets to develop talents to their best
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use among different types of businesses (Khanna & Palepu, 1997). Additionally, diversified
firms, because of their size and financial capability, can afford to build common facilities, such
as transportation networks, by spreading the high costs among their many business units.
The existence of a diversified corporate structure may also compensate for lower levels of
institutions in these environments. For example, opportunistic behaviors can be more efficiently
monitored and sanctioned by hierarchical authority (Williamson, 1975). Besides, frequent
business dealings within the diversified firm may elicit greater amounts of trust or cooperative
norms among sub-units (Gulati, 1995). By arranging corporate divisions to deal with one another
frequently, diversified firms can reduce transaction costs. Furthermore, the government in these
environments usually assumes a more active role in the economy. Facilitated by their scope and
influence in many sectors of the economy, diversified firms are more likely to foster close ties
with the government, allowing them to enjoy idiosyncratic state favors. Their unique, flexible
capabilities in establishing government relationships often are not tightly restricted to any
specific product market, thus allowing them to virtually “reproduce” themselves across many
different businesses (Whitley, Henderson, Czaban, & Lengyel, 1996). Rather than improving
transformational efficiency, these firms thus can extend their competitive advantages mainly by
erecting institutional barriers to entry across many product markets, such as changing “the rules
of the game” through lobbying (Hillman & Hitt, 1999). Accordingly, higher levels of product
diversification are likely to be associated with better performance in these environments.
Hypothesis 1b: In less munificent home country environments, product diversification ispositively related to firm performance.
Outbound International Diversification
Outbound international diversification has the potential to provide firms with a variety of
benefits. This diversification strategy allows a firm to leverage its capabilities across geographic
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markets, maximizing monopolistic advantages. Instead of being solely dependent on its home
country, a firm can lower its overall risk exposure by operating in foreign countries (Kim,
Hwang, & Burgers, 1993). Moreover, outbound international diversification allows a firm to gain
additional scale or scope economies and accumulate valuable international experience for
additional expansion (Johanson & Vahlne, 1977), to share core competencies across
multinational operations, or to reconfigure its value chain more optimally (Porter, 1990).
Accordingly, past studies have generally found that outbound international diversification is
positively related to firm performance (e.g., Grant, 1987). In more munificent home country
environments, firms would find it particularly beneficial to fully utilize the factors and
institutions in the country environment by engaging in outbound international diversification. As
such, firms may rely on the skills gained in their country environments to develop superior
competitive advantages to operate in foreign markets. Besides, their competitive edge is
sharpened by intense rivalry and sophisticated demand at home (Porter, 1990). Abundant
institutions would enable firms to acquire or develop advanced knowledge while adequate
intellectual property protection safeguards firms from losing their unique skills, thus ensuring an
adequate “appropriability regime” to encourage innovation (Teece, 1986). The level of market
competition is also enhanced due to active enforcement of anti-trust regulations, resulting in “the
survival of the fittest.” Inefficient firms are more likely to be acquired by efficient ones through
an active external market for corporate control (Walsh & Seward, 1990). Building on a solid
home base, firms in these environments are likely to be potent global competitors (Porter, 1990).
Hypothesis 2a: In more munificent home country environments, outbound internationaldiversification is positively related to firm performance.
In less munificent environments, firms may still prefer to pursue higher levels of outbound
international diversification, either to realize better returns, seek foreign inputs, or simply to find
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more favorable business locations. However, redeployment flexibility of firms’ competitive
advantages (Anand & Singh, 1997) determines if a firm may optimally transfer its skills and
capabilities across countries. Dominant firms in more munificent country environments can more
easily transfer their capabilities such as marketing skills or technologies to the international arena
(Porter, 1990). However, most firms in less munificent environments often lack globally
redeployable capabilities to successfully compete in foreign markets. For instance, insufficient
factors limit these firms’ ability to develop world-class technologies. Relatively lax anti-trust
enforcement implies that many product markets are dominated by less innovative incumbent
firms because challenges from new entrants are usually less severe and frequent. Dominant firms
are likely to compete largely based on institutional advantages, such as creating social ties with
the government or limiting entry through regulatory constraints (Hillman & Hitt, 1999).
Although these firms may be dominant at home, sometimes even with near-monopolistic status,
their institutionally based competitive advantages are in many respects localized in nature and
likely to dissipate in foreign countries. As such, outbound international diversification is unlikely
to lead to higher levels of performance in these environments and may even have detrimental
effects on performance as these firms are likely to be outcompeted in the global market.
Hypothesis 2b: In less munificent home country environments, outbound internationaldiversification is negatively related to firm performance.
Inbound International Diversification
The benefits of inbound international diversification are well recognized in the literature
(e.g., Contractor & Lorange, 1988). With better knowledge and technologies, multinational firms
may improve the productivity of host country firms (Blomstrom, Kokko, & Zejan, 2000). It is
often suggested that host countries’ primary gains from foreign firms come from skill or
technology spillovers to host country firms, which can result from personnel training by foreign
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firms or simply observation by host country firms (Caves, 1996). By forming cooperative
ventures with foreign partners, host country firms would have better access to unique sets of
skills and capabilities for improving their competitive position. In return, host country firms may
contribute specific local knowledge or utilize social connections to help deal with local
distribution or government agencies. Furthermore, cooperative partners may share risks with
each other, especially when they need to reduce exposures to risky projects or to compete with
more powerful competitors. Despite the benefits of cooperation with foreign partners, research
has noted the associated hazards (e.g., Hitt, Tyler, Hardee, & Park, 1995; Inkpen & Beamish,
1997). Porter (1990) views international alliances as inherently unstable, involving significant
coordination costs, difficulty in aligning incongruent strategic goals, as well as the risk of
creating a new competitor. Likewise, Inkpen and Beamish (1997) suggest that because of shifts
in partners’ bargaining power, international joint ventures are hardly stable relationships. As
such, cooperation with partners from foreign countries may have inherent pitfalls.
Understood within the conceptual framework of this study, the relative costs and benefits of
inbound international diversification may depend on home country environments. In more
munificent home country environments, inbound international diversification is less likely to
yield superior benefits because a larger number of firms have access to factors to develop
capabilities that are superior, or at least compare favorably, to foreign firms. As such,
contributions by most foreign firms would generally be less valuable. Due to well-developed
institutions in the environment, firms may obtain the needed knowledge by conveniently
transacting or allying with many domestic firms, rather than engaging in complex collaborative
activities with less familiar foreign firms that may mainly look for host country guidance or even
have hidden strategic intents (Hitt et al., 1995). Firms would be better off, as well as incur less
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risk, in focusing on utilizing the factors and institutions in their home country environments to
help them develop or obtain necessary skills and capabilities. On a relative basis, the increased
benefits may not be large enough to compensate for the significant costs of inbound international
diversification. Moreover, when the foreign firms possess competitive advantages that can
overcome the difficulty of competing in these environments, host partners’ local knowledge and
connections would be less attractive because existing institutions, such as efficient legal system,
would facilitate foreign entry. On the other hand, foreign firms that do not possess superior
capabilities would be quite cautious in allocating substantial investments entering these
munificent but highly competitive environments. Unless the host firms contribute substantial
assistance to their foreign partners, the cooperative ventures may not be very fruitful. To the
extent that managing these alliances or dealing with many foreign partners imposes a burden on
management or diverts managers’ attention away from intense domestic competition, as
evidenced by the joint venture between Dresser and Komatsu (Hitt et al., 1995), inbound
international diversification could even hurt performance.
Hypothesis 3a: In more munificent home country environments, inbound internationaldiversification is negatively related to firm performance.
On the other hand, firms in less munificent environments are likely to find inbound
international diversification particularly attractive. Foreign firms that possess superior
capabilities have the incentives and abilities to enter these environments to tap into local demand
or engage in export processing because host country firms, unmatched in competitive
capabilities, would find it difficult to mount meaningful defense (Caves, 1996). Despite their
potential advantages, foreign firms may still be hindered by a host of local hurdles, such as less
effective government bureaucracy, and at the same time compete with other potent foreign
entrants. It is beneficial for foreign firms to overcome the liability of foreignness by utilizing
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local partners to avoid institutional barriers (Zaheer & Mosakowski, 1997). Local partners can
also help build up foreign firms’ first mover advantages to discourage other potential foreign
entrants or to influence local regulatory process to solidify their footholds (Sarkar, Cavusgil, &
Aulakh, 1999). This creates opportunities for local firms to attract collaboration with foreign
partners to compete with other domestic firms. As these local firms learn from their foreign
partners, their competitiveness is likely to gradually increase as well.
Although firms in these environments often lack the capabilities to exit from its environment
and pursue outbound international diversification, inbound international diversification
represents a “virtual” exit to ally with outside parties to acquire quality skills and technologies
(Hirschman, 1970). Through such access to more capable foreign partners, these firms are able to
substitute for the inadequacy in factors and institutions in their environments. In addition, firms
pursuing inbound international diversification may neutralize the threats from foreign entrants by
turning some of them into partners while at the same time, becoming better equipped to counter
the attacks from other competing foreign entrants. Although the difficulty of managing
international alliances still exists (Inkpen & Beamish, 1997), it is likely that the benefits would
outweigh the costs of inbound international diversification for firms in these environments.
Hypothesis 3b: In less munificent home country environments, inbound internationaldiversification is positively related to firm performance.
Interactions
To compete globally, firms need to have superior advantages that allow them to compensate
for operating in less familiar countries. In Dunning’s (1992) eclectic approach, the basic
condition for a firm to successfully expand overseas is the possession of ownership-specific
advantages. In more munificent home country environments, competition among firms is intense
because abundant supplies of factors and institutions allow a larger number of firms to compete
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in the market. To compete in an intensely competitive marketplace, a firm must develop and
sustain its competitive advantages by continuously improving its products, meeting the challenge
of competitors, and satisfying high customer expectations (Porter, 1990). As argued earlier, to
develop competitive advantages in these more competitive environments, firms have to stay
focused on developing product market expertise. Over-diversification has negatively affected the
competitiveness of many U.S. firms in the past decades and resulted in a series of downscoping
efforts to focus on the firms’ core businesses (Hoskisson & Hitt, 1994). Accordingly, although
outbound international diversification is likely to increase firm performance in these
environments in general, higher levels of product diversification would negatively affect firms’
abilities to develop global competitive advantages.
Hypothesis 4a: In more munificent home country environments, the interaction betweenproduct diversification and outbound international diversification is negatively related tofirm performance.
Inbound international diversification is likely to be beneficial to firms in less munificent
environments because firms can draw on and learn from foreign partners’ expertise (e.g.,
Contractor & Lorange, 1988). Firms that are more diversified in these environments are also
hypothesized to achieve better performance as they have the abilities to create substitute
institutions and factors to facilitate their operations. In most cases, foreign partners would also
prefer to cooperate with these diversified firms because of their connection and influence in, as
well as market knowledge of, the environment (Zaheer & Mosakowski, 1997). To the extent that
diversified firms cooperate with foreign partners, their ability to dominate the market would
become even stronger. Often backed by the host government, these firms also possess the
bargaining power to request their foreign partners to transfer valuable knowledge or
technologies, further contributing to their competitiveness and hence performance. As such,
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pursuing higher levels of inbound international diversification and product diversification is
likely to be particularly beneficial in these environments.
Hypothesis 4b: In less munificent home country environments, the interaction betweenproduct diversification and inbound international diversification is positively related tofirm performance.
METHODS
There were two stages in constructing the sample. The first stage determined a sample of
countries, from which a sample of firms was constructed in the second stage.
Country Sample
The country sample was drawn from Western European countries. To adequately measure
environmental munificence, we used a larger number of variables as compared to most previous
studies (see Table 1). Following similar procedures used by studies premised on institutional
economics arguments in the fields of management (e.g., Bergara et al., 1998), international
business (e.g., Meyer, 2001), and economics (e.g., Knack and Keefer, 1997), we first
standardized the variables and then summed and averaged them to proxy the three components of
factors (endowed factors, advanced factors, and human factors) and institutions (political
institutions, legal institutions, and societal institutions), respectively. Then an average of the two
sets of components was taken to obtain factors and institutions correspondingly. A great majority
of the variables were obtained from the World Competitiveness Report, supplemented with
additional sources, and dated in the early 1990s. If the same variable is available for the 1980s,
an average was taken. As for societal institutions, additional description is needed. We used 3
items in the World Values Surveys, obtained from the Inter-University Consortium for Political
and Social Research: These 3 items are widely used and validated in a number of previous
studies in the disciplines of sociology and economics (e.g., Curtis, Grabb, & Baer, 1992; Knack
& Keefer, 1997; La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 1997a).
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----- Insert Table 1 about here -----
To examine the groupings of 16 West European countries, we used a number of classification
procedures. Please see the Appendix for details and a validity analysis. More munificent home
country environments include Denmark, France, Germany, Netherlands, Norway, Sweden,
Switzerland, and U.K. Less munificent home country environments include Austria, Belgium,
Finland, Ireland, Italy, Portugal, Spain, and Turkey. In order to obtain more accurate data on
international diversification, we narrowed the sample size to three countries in each group. The
countries selected had to meet the following criteria: (1) availability in the Worldscope database;
(2) unambiguous group classification; and (3) different types of countries within the contexts. In
accordance with the first criterion, Turkey was eliminated. Austria, Belgium, and Finland were
also eliminated as their groupings were not totally unambiguous. Sweden, France, and U.K. were
selected for the first group (more munificent environments) and Ireland, Italy, and Portugal for
the second group (less munificent environments). Because the countries within each group differ
in other respects such as cultural heritage, thus minimizing possible confounding effects due to
systematic differences in other country variables, one can more confidently interpret the
empirical results within the conceptual framework of this study. In the first group, there is a
diverse mix of attributes such as location and cultural heritage. In the second group, Italy and
Portugal can be argued to differ less. However, the only other option is Spain, which is also a
Southern European country, sharing Latin cultural heritage with Italy and Portugal. Finally, these
two groups of countries rendered an adequate firm sample size to test the hypotheses.
Firm Sample
Firms covered in the 1999 Worldscope database were used for the initial sample. For France
and U.K., the initial sample was constructed on the largest 300 firms ranked by sales. Financial
21
statement data were collected from Worldscope November CDs of 1996 to 1999. We used a
three-year average for the financial variables to avoid annual fluctuations in the accounting data.
Geringer et al (2000) suggest in their diversification study that a one-year lag is most appropriate
for reflecting a typical planning cycle. Therefore, our study also had a one-year lag between the
independent and control variables and the dependent variables. The total number of firms in the
final base sample is 722. For more munificent environments, the base sample contains 499 firms
(France: 177; Sweden: 115; UK: 207). For less munificent environments, the base sample
contains 223 firms (Ireland: 40; Italy: 133; Portugal: 50).
Operationalization of Variables
Performance. Returns on assets (ROA) was used as firm performance measure in the current
study. In addition, we also used earnings before interest and taxes divided by assets (EBIT) as an
indicator of firm performance. Because taxation rules as well as capital structure are likely to
differ among countries, EBIT can be considered to be a useful performance measure in cross-
country studies. The use of accounting-based performance measures facilitates comparing results
with most previous diversification studies (e.g., Hitt et al., 1997). Although market-based
performance measures may indicate the stock market’s perception of future performance, their
use is premised on the assumption of stock market efficiency, which is likely to differ between
more munificent and less munificent environments, and thus are less appropriate for our study.
Product diversification. Because many firms do not have segment revenues consistently
reported in Worldscope, the entropy measure of diversification could not be calculated. Because
Worldscope lists each firm’s 4-digit Standard Industry Classification (SIC) codes in order of
revenues (with a maximum of 5 SIC codes), following Gedajlovic and Shapiro (1998), we used
the imputed weighted diversification measure to calculate a firm’s level of product
22
diversification. Gedajlovic and Shapiro (1998) found a high correlation between the weighted
measure and the Herfindahl based measure (0.84) and the simple count measure (0.80),
respectively. Following these studies, this diversification measure was calculated as follows:
Degree of Diversification = Σ Pi * dij
where i = a firm’s primary market segmentj = a firm’s secondary market
dij = 0 if the firm operates in only one 4-digit industry = 1 if j is in the same 3-digit industry as i = 2 if j is in the same 2-digit industry as i
= 3 if i and j are in different 2-digit industries Pi = a weight imputed to each industry, assumed to decline geometrically.
Outbound international diversification. Because many firms do not have country or regional
segment revenues consistently reported in Worldscope, an entropy measure could not be
calculated. Some researchers use the total number of foreign countries where the firm had
subsidiaries or the total number of foreign subsidiaries as a proxy for outbound international
diversification (Barkema & Vermeulen, 1998). We used the number of foreign countries where
the firm had subsidiaries or cooperative ventures as the proxy for the level of outbound
international diversification, as joint ventures/strategic alliances have become increasingly
prevalent. The data were collected from Moody’s International Manual and Lexis-Nexis.
Inbound international diversification. Analogous to outbound international diversification,
the number of countries, as represented by the foreign partners of the firm’s cooperative
ventures, was recorded. We used Lexis-Nexis and Moody’s International Manual to search for
cooperative ventures for each firm in the sample. We ran a correlation test between a country
count measure and a cooperative venture count measure for Sweden and Ireland, respectively.
The correlations are 0.895 (p < .0001) for Sweden and 0.903 (p < .0001) for Ireland. The results
indicate that there is a high correlation between the two measures.
23
Control variables. Leverage was measured as total liabilities over total sales. We used total
sales as the denominator to avoid artificial correlations with the dependent variables, ROA and
EBIT. Sales growth was used to capture demand conditions facing a firm as well as product
cycle effects because firms operating in high-growth industries are likely to enjoy higher levels
of performance (Gedajlovic & Shapiro, 1998). It is measured as a percentage change in annual
sales. Because blockholders are especially prevalent among Western European firms, we used
the number of owners who had 5% or more ownership in the firm to control for the effects of
blockholders. Firm size was used to control for scale economies and captured by total sales in
U.S. dollars (logarithm). We used a 3-year average exchange rate to avoid artificial firm size
differences that may result from significant changes in exchange rates in one particular year.
Because performance may be influenced by diversification mode (Hitt et al., 1997), we
controlled for acquisition amounts (logarithm). The numbers were converted to U.S. dollars in
the same way as that for total sales. Using dummy variables, industry effects were controlled for
the six industry classes classified by Worldscope: industrial, transportation, banking, utility,
insurance, and other financial, with industrial as the reference group in the statistical models.
Worldscope’s classification is based on the firm’s primary business activity. In addition, a firm’s
performance may be influenced by systematic differences between individual countries (e.g.,
Thomsen and Pedersen, 2000). Accordingly, we used two sets of dummy variables to control for
such country effects, one for more munificent and one for less munificent countries.
RESULTS
Each model was tested using OLS regression. The means, standard deviations, and
intercorrleations for the variables used for the two groups of country environments are separately
presented in Table 2. There was no multicollinearity problem because no variance inflation
24
factor is greater than 10 and the mean of all the variance inflation factors was not considerably
larger than 1 (Chatterjee & Price, 1991). The standard errors reported below are
heteroscedasticity-consistent White’s (1980) standard errors.
----- Insert Table 2 about here -----
As Hypothesis 1a predicted, in more munificent environments, there is a statistically
significant negative relationship between product diversification and performance (p < .05 for
ROA and EBIT - see Models A and B in Table 3). As Models C and D in Table 3 show, product
diversification is positively related to performance (p < .05 for ROA and EBIT) in less
munificent environments (Hypothesis 1b). Hence, both Hypothesis 1a and Hypothesis 1b are
supported. As shown in Models A and B in Table 3, the coefficients of outbound international
diversification are positive and statistically significant (p < .10 for ROA; p < .01 for EBIT).
Hypothesis 2a is supported. These results suggest that firms in more munificent environments are
able to reap higher levels of performance when they engage in foreign operations. Hypothesis 2b
states that there is a negative relationship between outbound international diversification and
performance in less munificent environments. The coefficients of outbound international
diversification in both models, as reported in Models C and D in Table 3, are statistically not
significant. Hypothesis 2b is not supported. The coefficient of inbound international
diversification in Model A in Table 3 (for ROA) is statistically not significant but is statistically
significant in Model B (p < .10 for EBIT). Accordingly, Hypothesis 3a, which predicted a
negative relationship between inbound international diversification and performance in more
munificent environments, is partially supported. Hypothesis 3b states that inbound international
diversification is positively related to performance in less munificent environments. However,
the statistical results, as shown in Models C and D in Table 3, do not support Hypothesis 3b.
25
----- Insert Table 3 about here -----
With respect to the hypothesized interactions, the main effects that were used to form the
product terms in all the regression models presented below were centered (Aiken & West, 1991)
and the centered main effects were then used to form the product terms. Accordingly, variance
inflation factors indicated no problem of multicollinearity. The product terms (product
diversification X outbound international diversification), as presented in Models A and B in
Table 4, are statistically significant and negative (p < .05 for ROA; p < .01 for EBIT).
Hypothesis 4a, which states that in more munificent environments, there is a negative
relationship between performance and the interaction between product diversification and
outbound international diversification, is therefore supported. Hypothesis 4b states that in less
munificent environments, the interaction between product diversification and inbound
international diversification is positive. The product terms (product diversification X inbound
international diversification) reported in Models C and D in Table 4 are statistically significant
and positive (p < .01 for ROA and EBIT). Therefore, Hypothesis 4b is also supported.
----- Insert Table 4 about here -----
DISCUSSION
By and large, the empirical results lend support to the central proposition of this study that
home country environment is an important component in the study of corporate diversification.
As predicted, product diversification was negatively related to performance in more munificent
environments but positively related to performance in less munificent environments. The results
suggest that the negative effects found in prior United States sample studies may be largely
conditioned by the country environmental context. In regard to outbound international
diversification, firms in more munificent environments improve performance when they
26
diversify internationally. However, for firms in less munificent environments, although outbound
international diversification does not hurt performance, it does not provide substantial benefits
because most firms in these environments lack global competitiveness. As for inbound
international diversification, the results indicate that such a strategy may not always be
beneficial, as often expected, because the associated costs may nullify the possible benefits. For
less munificent environments, our results may suggest that the benefits of inbound international
diversification are difficult to realize than is commonly assumed. Furthermore, we hypothesized
and found that high product diversified firms in less munificent environments reap more benefits
from inbound international diversification. The overall results imply that the benefits of this
strategy seem to be limited to high product diversified firms, which usually are more dominant
and influential in these environments. We also found that high product diversified firms in more
munificent environments perform worse when they diversify internationally. Our overall
findings indicate that focused firms in these environments enjoy the benefits of outbound
international diversification whereas high product diversified firms suffer from such a strategy.
Lacking superior product market capabilities, high product diversified firms would find it
difficult to compete globally.
The empirical results held for a number of robust checks and alternative specifications. In
particular, we used the number of 2 digit SIC codes as a proxy for unrelated product
diversification and the results were consistent. Some studies have found that moderate levels of
product diversification generate more benefits, but other findings are mixed (e.g., Lubatkin,
1987). We tested for a symmetrical- or inverted U-shaped relationship for more munificent
environments but no such relationship was found. Firms may not easily realize the benefits
unless there is complementary internal control mechanism or managerial information capacity
27
(Hill & Hoskisson, 1987; Jones & Hill, 1988). Similarly, no symmetrical- or U-shaped
relationship was found for less munificent environments. We used the number of regions, instead
of countries, as a proxy for outbound international diversification and the results were generally
consistent. We also tested but did not find the presence of a curvilinear relationship between
outbound international diversification and performance. We examined if the interaction between
product and outbound international diversification would alleviate the negative impact of product
diversification, but similar to Tallman and Li’s (1996) findings, no significant effect was
detected. This outcome lends additional support to our finding that high levels of product
diversification in more munificent environments are harmful to firms’ global competitiveness.
Links with Extant Literature
Past literature in corporate diversification has paid insufficient attention to how home country
environments are related to corporate diversification. Instead of relying on fragmented
knowledge based on each individual country and possibly reaching incomplete or sometimes
even inappropriate conclusions, we adopted a comparative approach in this exploratory study
examining if the relationships between diversification strategies and performance are linked to
home country environmental contexts. The empirical findings provide support for our study’s
central proposition. Premised on the insights of institutional economics that business activities
are contingent on the levels of a country’s factors and institutions, our approach explicitly
incorporates the home country environmental context in the study of corporate diversification,
hence providing a valuable reference point for research from a cross-country perspective.
Furthermore, our study contributes to the corporate diversification literature by developing a
common set of rationales to explain the performance implications of both product and
international diversification strategies. This signifies that product and international
28
diversification strategies can be understood as strategic actions to substitute or utilize countries’
factors and institutions. In addition to the findings that various diversification strategies have
heterogeneous performance implications between dissimilar home country environments, we
hypothesized and found clear evidence that highly product diversified firms in more munificent
environments do not seem able to develop world-class competitiveness and their performance
suffers as a result of global operations. On the other hand, not all firms in less munificent
environments reap the benefits of inbound international diversification. Our study indicates that
only powerful, diversified firms may capture such benefits. In this regard, our study, by adopting
a cross-country, integrative perspective, was able to uncover the complex but important linkage
between product and international diversification strategies. Future research is likely to benefit
from continuing in this direction. Additionally, this study also broadens the geographic scope in
the study of diversification beyond the more traditional settings such as the United States or
Japan. However, instead of replicating past findings on new empirical settings, we adopt an
institutional economics perspective and build on extant arguments in the diversification literature
to suggest a fresh conceptual approach to study corporate diversification, one emphasizing the
significance of the home country environmental context. The explicit incorporation of the home
country environmental context, although introducing increased complexity into our received
knowledge in corporate diversification, is an important addition to the literature.
In a related vein, the perspective adopted here is broadly in line with some recent suggestions
in the resource-based literature that external, contextual factors are important in determining the
relevance or productivity of firms’ resources (e.g., Miller & Shamsie, 1996). As such, the
distinction of contextual environments based on the concept of munificence (Castrogiovanni,
1991) may hold promise for research, from the resource-based view, investigating how internal
29
firm resource development may be conditioned by environmental munificence. Accordingly, this
study may have implications for research on the resource-based view examining if the value of
firm-level resources may to a certain extent be externally determined (Priem & Butler, 2001).
Limitations and Suggestions for Future Research
Although our focus in this study is exploratory in nature, we found significant performance
differences among diversification strategies between dissimilar home country environments.
Future studies may investigate additional classifications of country environments to advance our
knowledge in this area. For instance, research on hybrid country environments with abundant
factors but inadequate institutions or vice versa would be interesting extensions. Additional
studies can explore if different kinds of factors and institutions would provide complementary or
conflicting influence upon one another. Such an examination can further illuminate how complex
country environmental variables influence the relationships between diversification strategies
and performance. Moreover, although Western Europe represents an appropriate testing ground
for this study, future studies would find it fruitful to extend the arguments developed in this
study to other parts of the world where more potential contrast between country environments
may exist. Our study primarily explored how country-level environmental munificence affects
the performance outcomes of diversification strategies. Future research might attempt to unravel
how specific factors and/or institutions influence firm strategies and performance. Furthermore,
we used broader proxy measures to capture the munificence level of the macro-environments.
Although the country-level measures used in our study are more comprehensive than prior
studies in this area, finer-grained measures will be able to more fully capture these country-level
variables, as well as to shed additional light on their direct influence. Moreover, future efforts in
creating an index on factors and institutions for a large number of countries, thus allowing the
30
use of additional statistical methods such as factor analysis, would be beneficial for the further
development of this line of research. Following most prior diversification studies, we used
dummies to control for industry effects. However, industry dummies may not fully partial out
industry effects as many firms operate in multiple industries. Future studies on business-level
strategies, focusing on single-business firms, would be able to address this aspect. Although our
study controlled for the effects of blockholders, prior studies (e.g., Thomsen and Pedersen, 2000)
found that ownership types affect performance differentially. Future research may benefit by
further teasing out the individual effects of various types of ownership.
Accordingly, our approach may have a potential link to the topic of international corporate
governance. Market-based governance structures help ensure firm efficiency by allowing a
separation of ownership and management. Adequate institutions, such as well-developed control
mechanisms, in more munificent environments may allow firms to transact with the most
efficient counterparts. Non market-based governance structures, such as family ownership, may
exist in response to low levels of environmental munificence. In further developing our
approach, future research on international corporate governance may build an integrated
conceptual framework for explaining the co-existence of different forms of governance
structures across home country environments. Another fruitful extension is to integrate our
approach with other macro-environmental frameworks, such as Murtha and Lenway’s (1994)
taxonomy of national systems of interest intermediation, and further examine the performance
implications of diversification strategies. This may broaden our approach’s theoretical scope to
explain the strategic behaviors of international entrants and cooperative partners.
Our approach may also improve understanding regarding the topic of international entry.
Previous literature in this area has largely focused on nationality or cultural symmetry as a key
31
country-level determinant of international entry decision (e.g., Kogut & Singh, 1988). Our
approach suggests that the matching of country environmental characteristics may also represent
a crucial element. For example, firms from countries with unstable political institutions but
abundant factors may have the incentives and abilities to enter environments where inward
foreign investments are particularly welcome. Such a matching of factors and institutions may
thus represent another important consideration in future international entry research.
Furthermore, research on corporate innovation and entrepreneurship may find our approach
useful. For example, in less munificent environments, firms may find it risky to develop core
competencies based on product innovation because appropriability regime is weaker (Teece,
1986). Moreover, human capital may be swayed to choose rent-seeking occupations, such as in
government bureaucracy or military, instead of pursuing entrepreneurial activities (Murphy,
Shleifer, & Vishny, 1991). Without adequate factors and institutions that foster innovative start-
ups, incumbent firms would dominate the business topography. As our research shows, although
these incumbent firms are dominant in less munificent environments, many of them are unlikely
to be potent global competitors. Despite intense competition in more munificent environments,
firms in these environments are more likely to be world-class companies. In this light, the theory
and evidence of this study may have important implications for corporate innovation and
entrepreneurship, particularly from a cross-country, comparative perspective.
In summary, we suggested and found that the relationships between corporate diversification
strategies and firm performance differ between home country environments. Our study highlights
the crucial importance of incorporating the home country environment into the study of
corporate diversification, and possibly in other strategy topics as well. Given the potential
32
importance of the conceptual approach developed in this study, further theoretical advancement
and empirical studies using this approach are likely to be fruitful.
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TABLE 1Country Environment Variables Used for Country Classification
Components Variables Data SourcesFactors Endowed
Factorsnatural resources; active labor supply (laborforce + urban population); energy sources(coal + oil + gas)
World CompetitivenessReport; United Nations data
AdvancedFactors
capital & technology investments (machinery& equipment investments + research &development expenditures); capital market(stock market + debt market + venture capitalmarket); physical infrastructure (roads + airtransport + railroads + port access +telecommunications + distribution systems +power)
World CompetitivenessReport; United Nations data;La Porta et al (1997b)
HumanFactors
education enrollment (secondary education +higher education); education quality (teacher-pupil ratio); research & developmentpersonnel
World CompetitivenessReport; United Nations data
Institutions PoliticalInstitutions
political transparency; fiscal policy (inflation+ government debt); bureaucratic corruption
World CompetitivenessReport; International CountryRisk Guide (c.f., La Porta etal., 1998)
LegalInstitutions
rule of law tradition; legal development(antitrust regulation + intellectual propertyprotection); judiciary system efficiency
World CompetitivenessReport; International CountryRisk Guide (c.f., La Porta etal., 1998); Gould & Gruben(1996)
SocietalInstitutions
society general trust; civic norms ofcooperation; associational intensity
World Values Survey
39
TABLE 2Descriptive Statistics and Correlations
More Munificent Home Country EnvironmentsMean S.D.1 N2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
1 ROA 0.04 0.05 498 2 EBIT 0.08 0.06 490 .93 3 France 0.35 0.47 499 -.36 -.35 4 Sweden 0.23 0.42 499 .09 .04 -.40 5 Transportation 0.05 0.22 499 -.09 -.08 -.01 .07 6 Banking 0.04 0.20 499 .09 .09 -.08 -.03 -.04 7 Utility 0.07 0.26 499 -.19 -.26 .14 -.08 -.06 -.05 8 Insurance 0.02 0.15 499 -.08 -.11 .02 -.02 -.03 -.03 -.04 9 Other Financial 0.05 0.22 499 .03 .02 -.09 .21 -.05 -.04 -.06 -.0310 Firm Size 14.49 1.83 499 -.13 -.16 .17 -.33 -.02 .13 .46 .23 -.1211 Leverage 3.84 42.16 499 .00 -.00 -.02 .07 .19 -.01 .05 .00 .00 .0312 Sales Growth 15.23 66.83 499 -.07 -.05 -.07 .04 .06 -.01 -.03 .01 -.00 -.01 -.0413 Blockholders 1.68 1.29 499 .00 -.01 -.16 .37 .00 -.12 -.15 -.09 .11 -.37 .03 .0014 Acquisition 4.93 5.51 499 .29 .32 -.54 -.18 -.07 .14 -.14 -.03 -.12 .11 -.05 -.04 -.1115 Product Diversification 1.03 0.41 499 -.05 -.05 .09 -.06 .02 .06 -.26 .00 -.10 .01 .00 -.12 .01 .0016 Inbound International Diversification 0.59 1.24 499 .01 .00 -.04 -.07 .00 .23 .04 -.05 -.09 .34 .11 -.03 -.10 .19 -.0117 Outbound International Diversification 9.64 12.62 499 .05 .06 .02 -.03 -.03 -.02 -.00 -.04 -.14 .35 -.01 -.07 -.07 .18 .05 .29
Correlations >= .09 or <= -.09 are significant at p < .05.
Less Munificent Home Country EnvironmentsMean S.D.1 N2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
1 ROA 0.02 0.04 223 2 EBIT 0.06 0.05 210 .91 3 Ireland 0.18 0.38 223 .13 .04 4 Portugal 0.22 0.42 223 .03 .01 -.25 5 Transportation 0.02 0.13 223 -.05 -.06 .02 .00 6 Banking 0.04 0.19 223 .10 .15 -.09 -.04 -.02 7 Utility 0.19 0.40 223 -.20 -.29 -.13 -.01 -.06 -.09 8 Insurance 0.05 0.22 223 -.05 -.15 .00 -.07 -.03 -.04 -.11 9 Other Financial 0.04 0.21 223 -.15 -.08 -.04 -.06 -.02 -.04 -.10 -.0410 Firm Size 13.59 2.23 223 -.10 -.09 -.19 -.32 -.07 .03 .50 .18 -.0611 Leverage 3.93 13.72 223 -.24 -.21 -.05 -.04 -.01 -.03 .19 -.02 .32 .0612 Sales Growth 25.72 139.86 223 -.02 -.02 .00 -.02 -.02 -.02 -.03 -.00 .33 .01 .0013 Blockholders 1.22 1.53 223 .14 .10 .65 .07 -.03 -.07 -.09 -.01 -.00 -.29 -.06 .0014 Acquisition 1.85 3.87 223 .22 .20 .62 -.07 -.06 -.09 .05 -.01 -.10 .00 -.03 -.00 .4215 Product Diversification 0.99 0.42 223 .12 .14 .00 -.37 .02 .01 -.14 .01 -.00 .18 -.06 .02 -.22 -.0516 Inbound International Diversification 0.68 1.53 223 .03 .08 -.11 -.03 .02 .06 -.04 -.02 -.08 .32 -.04 -.04 -.13 -.01 .0917 Outbound International Diversification 4.13 6.96 223 .06 .15 .02 -.18 -.07 .01 -.11 -.01 -.11 .36 -.08 -.04 -.05 .16 .10 .68
Correlations >= .13 or <= -.13 are significant at p < .05.
1 standard deviation2 number of observations
U.K. is the country reference group for more munificent home country environments and Italy is the country reference group for less munificent home country environments.Industrial is the industry class reference group.Due to missing data on the two dependent variables (ROA and EBIT), the number of observations in the empirical models is slightly different from the base samples.
40
TABLE 3Main Effects
More Munificent Less Munificent Home Country Environments Home Country Environments
Model A Model B Model C Model DDependent Variable ROA EBIT ROA EBIT
ProductDiversification
-0.010*(0.005)
-0.015*(0.007)
0.014*(0.007)
0.018*(0.009)
Outbound InternationalDiversification
0.3 X 10-3+
(0.2 X 10-3) 0.5 X 10-3**(0.2 X 10-3)
0.3 X 10-3
(0.4 X 10-3) 0.1 X 10-3
(0.5 X 10-3)Inbound InternationalDiversification
-0.002(0.002)
-0.003+
(0.002) 0.9 X 10-3
(0.002)-0.6 X 10-3
(0.002)Leverage 0.4 X 10-4**
(0.1 X 10-4) 0.5 X 10-4**(0.2 X 10-4)
-0.4 X 10-3*(0.2 X 10-3)
-0.4 X 10-3*(0.2 X 10-3)
Sales Growth -0.8 X 10-4*(0.3 X 10-4)
-0.9 X 10-4**(0.3 X 10-4)
0.1 X 10-6
(0.1 X 10-4)-0.9 X 10-5
(0.2 X 10-4)Blockholders -0.004+
(0.002)-0.006*(0.002)
0.003(0.003)
0.007+
(0.004)Firm Size -0.002
(0.002)-0.004+
(0.002) 0.2 X 10-3
(0.002) 0.002(0.002)
Acquisition 0.6 X 10-3
(0.5 X 10-3) 0.001+
(0.6 X 10-3)0.003*0.001
0.005**0.002
Transportation -0.023**(0.008)
-0.026**(0.008)
-0.017(0.012)
-0.021(0.017)
Banking 0.012(0.009)
0.014(0.012)
0.019*(0.009)
0.031*(0.013)
Utility -0.033**(0.007)
-0.058**(0.009)
-0.020**(0.006)
-0.049**(0.009)
Insurance -0.027**(0.009)
-0.057**(0.011)
-0.015**(0.005)
-0.050**(0.009)
Other Financial -0.001(0.013)
-0.001(0.014)
-0.019(0.019)
0.011(0.020)
France - Ireland -0.040**(0.006)
-0.042**(0.008)
-0.014(0.015)
-0.046*(0.021)
Sweden – Portugal -0.002(0.007)
-0.001(0.008)
0.004(0.006)
0.002(0.009)
Constant 0.098**(0.027)
0.182**(0.035)
0.005(0.022)
0.013(0.030)
N 498 490 223 210R2 0.21 0.25 0.20 0.27F-statistic 8.56** 10.44** 3.36** 4.90**Standard errors are in parentheses.
+ p < .10 * p < .05
** p < .01
Significance tests are two-tailed for control variables and one-tailed for hypothesized effects.
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TABLE 4Interaction Effects
More Munificent Less Munificent Home Country Environments Home Country Environments
Model A Model B Model C Model DDependent Variable ROA EBIT ROA EBIT
ProductDiversification
-0.010*(0.005)
-0.016*(0.007)
0.015*(0.007)
0.019*(0.009)
Outbound InternationalDiversification
0.3 X 10-3*(0.2 X 10-3)
0.6 X 10-3**(0.2 X 10-3)
0.4 X 10-3
(0.4 X 10-3) 0.1 X 10-3
(0.5 X 10-3)Inbound InternationalDiversification
-0.002(0.002)
-0.003+
(0.002)-0.6 X 10-4
(0.001)-0.001(0.002)
Product Diversification xOutbound International Diversification
-0.7 X 10-3*(0.4 X 10-3)
-0.001**(0.5 X 10-3)
Product Diversification xInbound International Diversification
0.006**(0.002)
0.010**(0.003)
Leverage 0.5 X 10-4**(0.1 X 10-4)
0.6 X 10-4**(0.2 X 10-4)
-0.4 X 10-3*(0.2 X 10-3)
-0.4 X 10-3*(0.2 X 10-3)
Sales Growth -0.8 X 10-4*(0.3 X 10-4)
-0.9 X 10-4**(0.3 X 10-4)
0.6 X 10-6
(0.1 X 10-4) 0.7 X 10-5
(0.2 X 10-4)Blockholders -0.004*
(0.002)-0.006*(0.002)
0.003(0.003)
0.007(0.004)
Firm Size -0.002(0.002)
-0.004+
(0.002)-0.2 X 10-3
(0.002) 0.002(0.002)
Acquisition 0.6 X 10-3
(0.5 X 10-3)0.001+
(0.6 X 10-3)0.003**0.001
0.005**0.002
Transportation -0.022**(0.008)
-0.025**(0.008)
-0.016(0.012)
-0.018(0.017)
Banking 0.012(0.009)
0.014(0.012)
0.020*(0.009)
0.034*(0.013)
Utility -0.031**(0.007)
-0.055**(0.009)
-0.019**(0.006)
-0.046**(0.008)
Insurance -0.026**(0.009)
-0.056**(0.011)
-0.015**(0.005)
-0.049**(0.009)
Other Financial -0.2 X 10-3
(0.013)-0.7 X 10-3
(0.014)-0.019(0.019)
-0.012(0.020)
France - Ireland -0.035**(0.006)
-0.043**(0.008)
-0.014(0.015)
-0.049*(0.021)
Sweden – Portugal -0.003(0.007)
-0.012(0.008)
0.004(0.006)
0.001(0.009)
Constant 0.095**(0.029)
0.178**(0.036)
0.018(0.022)
0.003(0.028)
N 498 490 223 210R2 0.22 0.25 0.20 0.29F-statistic 8.23** 10.11** 3.28** 4.83**Standard errors are in parentheses.
+ p < .10* p < .05
** p < .01Significance tests are two-tailed for control variables and one-tailed for hypothesized effects.
42
APPENDIX: Country Environment Classification Procedures and Validation
To first examine the groupings of 16 West European countries, we added up factor andinstitutions components and used a split half (and median spilt) criterion. The first group (moremunificent home country environments) includes Denmark, France, Germany, Netherlands,Norway, Sweden, Switzerland, and U.K. The second group (less munificent home countryenvironments) includes Austria, Belgium, Finland, Ireland, Italy, Portugal, Spain, and Turkey.Using a mean spilt criterion, Austria, Belgium, Finland group with Denmark, France, Germany,Netherlands, Norway, Sweden, Switzerland, and U.K. In addition, we performed cluster analysisto classify these countries. We clustered the countries on factors and institutions and used threeclustering algorithms: average linkage, centroid, and median. The two groups identified from theclustering outcomes are equivalent to those of using a mean split criterion.
In general, we also followed Malos and Campion’s (2000) clustering validation procedures.First, The viability of the clustering results was supported by significant mean differencesbetween the two groups of countries, both for factors and institutions as well as for the sixcomponents. Second, we also used a set of validation variables to test the mean differencesbetween the two groups of countries. The results are also reported in the table below. Third, werandomly deleted 4 countries. The cluster groupings of the remaining countries remainedunchanged. Lastly, we performed discriminant analysis on the two clustering variables, withcluster membership as the class variable; the canonical correlation (0.928) is highly significantsupporting our clustering results.
Tests of Mean Differences of Clustering and Validation Variables
More MunificentHome Country Environments
Less MunificentHome Country Environments
Mean Mean t
Factors 0.577 -1.270 8.634**
Endowed factors 0.262 -0.576 2.769**Advanced factors 0.470 -1.033 6.754**Human factors 0.423 -0.931 4.775**
Institutions 0.405 -0.889 5.700**
Political institutions 0.477 -1.050 5.410**Legal institutions 0.509 -1.120 5.688**Societal institutions 0.227 -0.498 2.022*
Validation variables:Euromoney country creditrisk ratings
0.467 -1.028 3.838**
Hall & Jones country rating 0.541 -1.191 5.547**Heinz political risk rating 0.334 -0.736 2.234*Gwartney et al economicfreedom index
0.298 -0.655 1.917*
Human Development Index 0.470 -1.033 3.632**GDP Per Capita 0.503 -1.106 4.189***p < .05; ** p < .01; One-tailed tests.
43
William P. Wan is an assistant professor of management at Thunderbird, The AmericanGraduate School of International Management. He received his Ph.D. degree in strategicmanagement from Texas A&M University. His current research interests include corporatediversification, international strategy, and corporate governance.
Robert E. Hoskisson currently holds the Rath Chair in Strategic Management at the Michael F.Price College of Business at the University of Oklahoma. He received his Ph.D. degree from theUniversity of California, Irvine. His research topics focus on corporate and internationaldiversification strategy, corporate governance, acquisitions and divestitures, privatization andcooperative strategy.