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International Journal of Contemporary Business StudiesVol: 4, No: 2. February, 2013 ISSN 2156-7506Available online at http://www.akpinsight.webs.comhypothesized national culture dimension as a moderator between international diversification strategy andperformance .One basis of this notion a model is developed to divide world into diversification region.International diversification strategyInternational Diversification strategy has negative relations with financial performance has been proved inMeta analysis. (Capon, Farley and Hoenig, 1990) While discussing several advantages whichInternational diversification offers to firms? Buhner (1987) argue that international diversificationprovides future market opportunities, which gives firms the chance for greater expansion. The mostacknowledged argument for international diversification has been stranded on the hypothetical statementthat firms utilize the benefits of internalization in international markets (Hymer, 1976; Rugman, 1981;Caves, 1982).The benefits of economies of scale, economies of scope and learning can be achieved via internationaldiversification strategy and from international markets.(Kogut, 1985; Ghoshal, 1987; Kim et al., 1989,1993), and also allocation of core competencies between diverse business segments and geographicmarkets (Hamel, 1991).The complexity of firm’s operations is based on the experience of firm ininternational diversification (Zeithaml et al., 1985; Patterson and Cicic, 1995). Rugman (1981) found thatfirms with more international diversification experience have less diversification costs than firms withless diversification experience. Also targeting the national culture firms should mould the managementsystems in response to the local environment (Ghoshal, 1987).Performance“Business firms are compared in terms of profits, sales, market share, productivity, debt ratios, and stockprices. Hospitals use cost recovery, mortality and morbidity rates, board certification of physicians, andoccupancy rates. Universities use research productivity and prestige of faculties, test scores of students,rankings by popular magazines, and win/loss records of football teams.”(March and Sutton, 1997.p. 698)International Diversification strategy has negative relations with financial performance has been proved inMeta analysis. (Capon, Farley and Hoeing, 1990)Pothukuchi et al. (2002, p. 258) originate that the accepted negative effect from partner difference on IJVperformance originates more from differences in organizational culture than from differences in nationalculture While in some cases increased national differences can lead to higher performance of internationalalliance partners. (Morosini et al., 1998). Another area of research has discussed a nonlinear relationshipbetween multinationality and performance, and has argued for a hypothetical foundation for justificationof their position (Tallman and Li, 1996; Hitt et al., 1997; Gomes and Ramaswamy, 1999; Kotabe et al.,2002).Criticizing this concept, Dess et al. (1995) argue that geographic scope is not relevant to performance;rather, it is the ownership of proprietary assets—which is the momentum to foreign direct investment andthat is the final source of higher firm performance. Montgomery (1985) and Christensen and Montgomery(1981) establish confirmation that performance differences between diversified firms were attributable inpart to differences in market structure between the industries in which the firm competed.International Diversification Strategy and PerformanceThe relationship between international diversification and firm performance has been an important topicfor researchers in strategic management and international business (Buhner, 1987; Grant, 1987; Danielsand Bracker, 1989; Geringer et al., 1989; Haar, 1989; Tallman and Li, 1996; Hitt et al., 1997; Delios andBeamish, 1999; Gomes and Ramaswamy, 1999; Geringer et al., 2000; Kotabe et al., 2002). Thisimportance of international diversification is due to representation of a growth strategy (Chandler, 1962;Ansoff, 1965) that has most important prospective impact on firm performance.2013©Academy of Knowledge Process88
International Journal of Contemporary Business StudiesVol: 4, No: 2. February, 2013 ISSN 2156-7506Available online at http://www.akpinsight.webs.comKeeping in mind the transaction cost and the resource base view, Tallman and Li (1996) reported thatperformance will vary if international diversification is in non-linear shape. Multinational companiesoperating in a hostile environment there exist a positive relationship between experience diversity andperformance of the organization( Luo & Peng).Multinationals incur costs of internationalization as well asreap the benefits. Diversification strategy has negative relations with financial performance has beenproved in meta analysis. (Capon, Farley and Hoenig, 1990)Ruigrokand Wagner (2003) reported internationalization as not a sufficient condition for superiorperformance and argue that it is an over simplistic approach to theory building. Whereas researchers ininternational business and IOE normally give emphasis to economies of scale and scope (Buckley andCasson 1976; Caves, 1971), researchers in financial economics focused on portfolio diversification and itseffect on companies’ risk-return performance ( Lessard 1976, Levy and Sarnat,1970).Anju (1998), reported that diversification is a common occurrence in Asia, quoting examples of theconglomerates of India (Tata Group) and South Korean (Hyundai).Recent work such as (Denis et al.,2002; Palich et al., 2000) has studied the value of international diversification as a corporate strategy,and its impact on corporate performance.A theoretical literature support can be found that unrelateddiversification of a firm leads to affect the performance negatively (Rumelt, 1974; Bettis, 1981;Christensen and Montgomery, 1981; Bettis and Mahajan, 1985).Current research shows thatdiversification in product inversely impact the performance of firm (Berger and Ofek, 1995; Denis et al.,1997).Porter (1990) positively identified issue between different nations which decide the competitiveness of anation-state, same as a view uphold by Grant (1991). A firm with global diversification economies ofscale, by placing each chain of its value-added chain in the equivalent least-cost country (Kogut, 1985).Internationally diversified firms also enjoy the following benefits (Kim et al., 1993):1. Wide range of presence in different markets can save firm from aggressive expansion bycompetition.(Hill& Jones , 1998)2. Firms with wide international diversification has reach in different economies.3. A Firm with international diversification is secure from market thrusts of demand and supply.Quantitative research on international diversification and performance has found mixed results. Hitt et al.(1997) studied the U.S firms and taking product diversification as a moderator found U-shapedrelationship between international diversification and performance Geringer et al. (2000) studied theJapanese firms and concluded that IDS does not increase profit of firms but it positively impacts thegrowth of the firm. Lee et al. (2003) studied the Korean firms and showed a positive relationship of IDSand performance.Pitts and Hopkins (1982) conducted an outstanding review of the theoretical and practical issues involvedin measurements. Some early addition of Rumelt's work simply circumvented the measurement problemby using the same firms and classifications (Bettis, 1981; Bettis & Hall, 1982). Scholars interested inexamination of link among diversification and performance has tried to come up with a new scale thatcombine the conceptuality of Rumlet’s scheme and accessibility of data based on SIC code.(Palepu,1985).Firms try to expand from their original businesses in new markets and Diversification is a means toachieve those expansion objectives. (Aaker 1980, Andrews 1980, Berry 1975, Chandler 1962, Gluck1985). Research reveals top management to be aggressively engaged in diversification activities. Rumelt(1986)studied fortune 500 companies found that till 1974 only 14 percent firms operated as singlebusinesses and 86 percent operated as diversified businesses.2013©Academy of Knowledge Process89
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