International Diversification, Industrial Diversification and Firm Performance of Hong Kong MNCs

Although multinational corporations (MNCs) are not new to business research, Asian MNCs and their performance have yet to be widely studied. This study investigates the relationship between international diversification, industrial diversification and firm performance of MNCs from Hong Kong. In contrast to previous findings, the results show that Hong Kong MNCs are more internationally diversified, but not performed better, than domestic firms. Also, among Hong Kong MNCs, international diversification has a positive impact on profitability and sales growth, but not on the profitability. Industrial diversification also enhances profitability stability but reduces profitability significantly. Neither the hypothesized inverted U-shaped relationship between international diversification and performance nor the interaction effect from both international and industrial diversification strategies on performance can be validated. Implications are discussed with reference to the local context.     

Prior performance characteristics of related and unrelated acquirers

In the diversification literature, studies, particularly those using accounting‐based performance measures, have found that related diversifiers are more profitable and that related diversifiers are in more profitable industries than unrelated diversifiers. Due to the very nature of these studies based on cross‐sectional data, however, the causal relationship between diversification strategy and performance was not clear. This paper focuses on a single event of a large acquisition, which enables us to better identify the sequential relationships between prior firm profitability, prior industry profitability, and subsequent acquisition strategies. By doing so, this paper makes clearer the causal relationships between firm profitability, industry profitability, and acquisition strategies. Copyright © 2003 John Wiley & Sons, Ltd.     

Diversification strategy and profitability

Prior work has shown an association between diversification strategy and profitability. This paper replicates that association using more recent and complete data and goes on to investigate the sources of the association. Theoretical arguments are advanced which predict the association which will remain once the effects of varying industry profitability are removed. Empirical tests verify this prediction and permit the discrimination between the effects of industry and diversification strategy on profitability.     

External control,corporate strategy,and firm performance in research-intensive industries

This paper explores the proposition that the divergence of interest between managers and stockholders has implications for corporate strategy and firm profitability. Stockholders prefer strategies which maximize their wealth. Managers prefer strategies which maximize their utility. It is theorized that in research-intensive industries, when stockholders dominate, innovation strategies are favored. When managers dominate, diversification strategies are favored. In addition, innovation is argued to be associated with greater firm profitability than diversification. This theory is tested on 94 Fortune 500 firms drawn from research-intensive industries. The results largely confirm theoretical expectations.     

Diversification strategies,business cycles and economic performance

Two major diversification strategies of firms are examined: diversification into related businesses and diversification into unrelated businesses. The first strategy attempts to exploit operating synergies. In the second, the firm attempts to gain financial benefits from its ability to increase leverage due to a greater stability of cash flows. The study utilizes a large sample affirms to assess empirically the benefits and costs of these two diversification strategies by developing a new measure of diversification across business cycles and economic sectors. This new measure is compared with Berry—Herfindahl type measures of total diversification and recent measures of diversification into related businesses. The results indicate that pure financial diversification is associated with (a) more stable cash flows, i.e. lower operating risk; (b) increased levels of leverage; and (c) lower profitability. These observations are in accord with the theory. We also reaffirm that firms which diversify into related businesses have, on the average, higher profitability than non-diversified firms, although these results are not always statistically significant.     

Why strategic factor markets matter: “New” multinationals' geographic diversification and firm profitability

This study examines firm profitability differences among “new” multinational enterprises (NMNEs) pursuing geographic diversification into two distinct types of geographic locations based on the development of strategic factor markets. Building on strategic factor markets theory, we propose that firm‐specific advantages of NMNEs contribute differentially to firm profitability because they evolve differently given strategic factor market differences in host compared to home countries. Using a sample of Korean manufacturing MNEs during the 1993–2003 period, we find that geographic diversification into resource‐poorer host countries has a positive relationship with firm profitability, whereas geographic diversification into resource‐richer host countries has a U‐shaped relationship with firm profitability. Our study demonstrates why strategic factor markets—an important and often overlooked contextual factor—matter in exploring rationales for geographic diversification. Copyright © 2014 John Wiley & Sons, Ltd.     

Product and international diversification among Japanese multinational firms

This paper examines the relationship of performance with product and international diversification on Japanese multinational firms from 1977 to 1993. We show the relationships between diversification and performance change over time through the use of multiple time periods and accounting for keiretsu membership. Results show that while diversity strategies vary between keiretsu and non‐keiretsu firms, performance is not much different. Across time periods, performance varies considerably, but strategies are less variable. Product diversity has weak effects on firm performance only in one time period, while international diversification has negative profitability and positive growth consequences in in some periods. These results suggest first that diversification strategies and their effects on performance vary across time periods and generally produce some unexpected findings. We do not find strong interactive diversity effects. Copyright © 2000 John Wiley & Sons, Ltd.     

Geographic scope,product diversification,and the corporate performance of Japanese firms

The study extends research on the geographic scope, product diversification, and performance relationship by exploring both the antecedents and consequences of geographic scope. In so doing, it addresses a fundamental criticism of the geographic scope–performance relationship; namely, that the observed positive relationship between geographic scope and performance is spurious because it is the possession of proprietary assets that is the foundation of superior performance, not expansion into international markets per se. We tested the research model with data on the corporate performance of 399 Japanese manufacturing firms. In the partial least squares analyses used to examine the study’s six main hypotheses, we demonstrate that geographic scope was positively associated with firm profitability, even when the competing effect of proprietary assets on firm performance was considered. Further, we find that performance was not related to the extent of product diversification, although investment levels in rent‐generating, proprietary assets were related to the extent of product diversification. Copyright © 1999 John Wiley & Sons, Ltd.     

Estimating the performance effects of business groups in emerging markets

Business groups—confederations of legally independent firms—are ubiquitous in emerging economies, yet very little is known about their effects on the performance of affiliated firms. We conceive of business groups as responses to market failures and high transaction costs. In doing so, we develop hypotheses about the effects of group affiliation on firm profitability: affiliation could either boost or depress firm profitability, and members of a group are likely to earn rates of return similar to other members of the same group. Using a unique data set compiled largely from local sources, we test for these effects in 14 emerging markets: Argentina, Brazil, Chile, India, Indonesia, Israel, Mexico, Peru, the Philippines, South Africa, South Korea, Taiwan, Thailand, and Turkey. We find evidence that business groups indeed affect the broad patterns of economic performance in 12 of the markets we examine. Group affiliation appears to have as profound an effect on profitability as does industry membership, yet strategy scholars have a much clearer grasp of industries than of groups. Moreover, membership in a group raises the profitability of the average group member in several of the markets we examine. This runs contrary to the wisdom, conventional in advanced economies, that unrelated diversification depresses profitability. Overall, our findings suggest that the roots of sustained differences in profitability may vary across institutional contexts; conclusions drawn in one context may well not apply to another. Copyright © 2001 John Wiley & Sons, Ltd.     

Market,organizational and managerial correlates of economic performance in the U.K. Electrical Engineering Industry

Hypotheses relating to market, organizational and managerial determinants of profitability and growth are developed and tested using data collected by structured interviews in 45 randomly selected companies in the electrical engineering industry. Multiple regression analysis suggests that market share and barriers to entry are the principal determinants of profit margins, but that tightness of control of working capital and aggressive management style also have an important influence. Centralization of decision-taking among smaller companies, too, was associated with greater profitability, whilst more extensive budgetary control and planning of acquisitions or diversification were both negatively correlated with the latter. Profitability was the single most important predictor of the rate of company growth of sales but constraints from organized labor, from sources of finance, and conservative management styles, the rate of product change, R&D intensity, and decentralization all entered significantly.     

Power dependence,diversification strategy,and performance in keiretsu member firms

Conceptualizing the keiretsu as a power‐dependence system, we propose that benefits accruing from keiretsu affiliation differ across member firms, depending on their power in (or dependence on) the keiretsu. By integrating power with governance and internal market perspectives on group affiliation, we develop and find general support for the hypotheses that powerful keiretsu member firms are able to place more emphasis on growth in pursuing product and international diversification, whereas less powerful keiretsu member firms are subject to strong monitoring and emphasize profitability. These findings provide support to the study's proposition that power‐dependence relationships in a keiretsu influence member firms' appropriation of group affiliation benefits in pursuing diversification strategies. Copyright © 2004 John Wiley & Sons, Ltd.     

Diversification and market performance

Review of Industrial Organization - Recent theoretical research indicates that diversification may affect industry profitability for reasons (e.g., improved efficiency and increased entry) other...     

Power and firm profitability in supply chains: french manufacturing industry in 1993

The paper examines the relationships between the power of suppliers and buyers and the profitability of sellers who are situated in supply chains between both sets of firms. A review of the literature on power in exchange relations shows there are several power concepts which may have a different impact on seller profitability and whose impact possibly can offset each other. This may be the source of the conflicting evidence on this topic. A failure to distinguish among the concepts may also lead to an underestimation of industry effects relative to resource effects as drivers of firm profitability. The paper uses a new data base of the Banque de France on French manufacturing industry. The anlayses examine whether different power concepts may be empirically identified and what their relationships are with seller profitability. The findings point to the existence of multiple power concepts and indicate that, in the sample, industry effects are more important than firm effects (as measured by relative market share) in explaining seller profitability. The findings also suggest that buyer power explains a much larger percentage of the variance in seller profitability than supplier power. © 1998 John Wiley & Sons, Ltd.     

How do interdependencies among human‐capital deployment,development, and diversification strategies affect firms' financial performance?

Using key insights from the resource‐based view of the firm, we develop and test a theory of how firms can successfully deploy and develop their strategic human assets while managing the trade‐offs in their service and geographical diversification strategies. In a sample of large law firms we find that, even though firms profit from expert human‐capital leveraging strategy and service and geographical diversification strategies individually, pursuing these strategies simultaneously at high levels produces negative interaction effects on firm profitability. In addition, the internally developed, firm‐specific associate human capital strategically fits better with high levels of expert human‐capital leveraging. While lateral hiring helps firms build new knowledge bases and take advantage of growth opportunities, pursuing high levels of both expert human‐capital leveraging and lateral hiring of associates results in lower profitability. To fully capture the economic benefits from strategies of diversification, human‐capital leveraging and lateral hiring, firms should understand and manage the complex interdependencies among multiple levels of strategy. Copyright © 2005 John Wiley & Sons, Ltd.     

Restructuring through spin-off or sell-off: transforming information asymmetries into financial gain

The authors examine how managers select between corporate restructuring implementation alternatives and how those decisions influence the profitability of the restructuring event. They argue that managers and owners have information asymmetries with respect to the assets in the restructuring and the restructured firms' diversification strategy, and that managers select between two popular implementation alternatives, spin-offs and sell-offs, to convert knowledge differences into financial gain. When the restructured assets reside in primary and related business lines or the firm has low and related diversification among its business lines, the restructuring is difficult for observers to assess and understand. Spin-offs most effectively and profitably reduce information asymmetries by transferring assets to the capital market and increasing the efficiency and transparency of the restructuring firm. Conversely, when the restructured assets reside in secondary and unrelated business lines or the firm has high diversification, sell-offs best mitigate asymmetries by using market forces to reallocate assets to their most productive uses while improving the strategy and performance of the restructuring firm. Tests of a sample of 204 restructuring events support the hypotheses. Overall, the findings suggest that the influence of corporate restructuring on financial performance is determined in part through how the restructuring is implemented. Copyright © 2007 John Wiley & Sons, Ltd.     

Rent‐Sharing under Different Bargaining Regimes: Evidence from Linked Employer–Employee Data

Using Belgian linked employer–employee data, we examine how collective bargaining arrangements affect the relationship between firms' profitability and individual wages via rent‐sharing. In industries where agreements are usually renegotiated at firm‐level (‘decentralized industries’) wages and firm‐level profits are positively correlated regardless of the type of collective wage agreement by which the workers are covered (industry or firm). On the other hand, where firm‐level wage renegotiation is less common (‘centralized industries’), wages are only significantly related to firms' profitability for workers covered by a firm‐level collective agreement. Thus, industry‐wide contracts that are not complemented by a firm‐level collective agreement suppress the impact of firm profits on workers' wages in centralized industries.     

Are strategy-performance relationships contingent on macroeconomic environments? Evidence from Japan’s textile industry

This study examines the dynamic relationships between product and international diversification, keiretsu financing, and economic performance of the listed firms in Japan’s textile industry. Panel data analysis shows that the performance effects of those strategic factors are contingent on macroeconomic environments, rather than showing consistent relationships. The potentially positive or negative effects of particular diversification strategies and keiretsu financing are neutralized in the munificent environments, as exogenous macroeconomic factors overwhelm endogenous decision-making by the management. In the scarce setting, by contrast, it is those strategic factors that influence financial outcomes. Keiretsu financing moderates the relationship between international diversification strategy and profitability positively only during times of economic scarcity.

New Product Development Processes and New Product Profitability: Exploring the Mediating Role of Speed to Market and Product Quality

In new product development, faster is not always better. Conceptually, being faster to market should improve financial performance by improving product quality and reducing development expenses. Empirical support is mixed, however, demonstrating that higher speed to market exhibits an inverted U‐shaped relationship with product profitability. Conventional wisdom and empirical research suggest managers make speed to market–product quality–development expense trade‐offs. A particular concern regarding speed to market is that extreme speed may jeopardize product quality. Some researchers suggest that speed to market improves product quality while others suggest firms must balance both speed to market and product quality. Also, shorter lead times may be associated with reduced development expenses, but empirical evidence is conflicting. This research attempts to reconcile conflicting results regarding the speed to market–product quality relationship, their joint impact on product profitability, and their mediation role in the effects of development expenses and cross‐functional integration on product profitability. Partial least squares (PLS) is used to analyze multiplexed archival and survey data collected from NPD managers for 1115 different NPD projects in several firms. The results support the hypothesized equations, explaining 27% of speed to market variance, 35% of product quality variance, and 45% of product profitability variance. This study makes two contributions. First, because speed to market and product quality are related, simultaneous consideration of both factors enhances insight into their joint effect. Second, it provides evidence that speed to market and product quality jointly mediate development expense by NPD phase and cross‐functional integration effects on product profitability. Key results from the large sample data analysis include the following. Speed to market and product quality both enhance product profitability, but the impact of speed to market is larger than that of product quality. Speed to market and product quality partially mediate the impact of fuzzy front end phase expenses on product profitability, while expenses in the latter phases exhibit no impact on the mediators or profitability. Thus, the results suggest that trade‐offs are made not only between time, quality, and expense (i.e., if additional expenses are incurred at all), but also that trade‐offs relate to when (i.e., in which NPD phase) additional development expenses are incurred. Finally, cross‐functional integration (both internal and external) substantially impacts product profitability through a mix of direct and mediated effects.     

Diversification strategy,capital structure,and the Asian financial crisis (1997–1998): evidence from Singapore firms

We use agency theory to predict the influence of related and unrelated product diversification on a firm's level of debt financing. Further, we argue that the link between diversification and capital structure is moderated by the environment in which firms operate. Using SAS PROC MIXED, we fit a mixed‐effects model to our unique six‐year longitudinal dataset (1995–2000) of 245 publicly listed Singapore firms. Our data spans the period of the Asian Financial Crisis (1997–1998). We find that firms pursuing unrelated product diversification take on less debt financing in stable environments, but more debt financing in dynamic environments. Using longitudinal structural equation modeling, we find a reciprocal relationship between a firm's product diversification strategy and its debt financing level. Copyright © 2009 John Wiley & Sons, Ltd.     

Investment decisions in troubled times: A Bayesian approach applied to Brazilian firms

This study analyses the investment decision of 497 Brazilian firms during a period of unstable macroeconomic conditions. The role of financial constraints is considered in a Bayesian econometric model. We estimate three different models, and the results indicate the presence of financial restrictions, especially for capital-intensive firms. The recursive predictive density criterion indicates that the most preferred model is the one in which firm-specific effects are correlated with cash-flow. Financial restrictions are more important for capital-intensive firms, probably due to their lower profitability indexes, higher fixed costs and higher degree of property diversification.