Acknowledgment: The author would like to thank Dr. D. Dikova for her support and
Master Thesis International Economics & Business
“Strategic
corporate
diversification
and
performance: The moderating effect of both
environmental munificence and firm size”
June 2010
Author:
C.L.F. Seevinck
MSc International Economics & Business Faculty of Economics & Business
University of Groningen Bestevaerstraat 23-2
1056 HE Amsterdam, The Netherlands c_seevinck@hotmail.com
Supervisor: Dr. D. Dikova
Faculty of Economics & Business University of Groningen
ABSTRACT
Diversification is a strategic option that firms can use to improve their performance. It is a field of research that has been studied extensively. This study attempts to further investigate the strategic corporate diversification and firm performance relationship by suggesting that this relationship is also related to both home country environments and firm size. By examining 20 European countries, a sample of more- and less munificent home country environment was created. Using a sample of firms that consisted of both SMEs and MNEs from either a more- or less munificent home country environment, support was found for the central proposition of this study. Environmental munificence and firm size both influence the strategic corporate diversification-performance relationship and play a vital role in the study of corporate diversification strategies.
TABLE OF CONTENT
1. INTRODUCTION ... 4
2. THEORY AND HYPOTHESES ... 7
2.1 Environmental munificence ... 7
2.2 Strategic Corporate Diversification ... 8
2.2.1 Product Diversification ... 9
2.2.2 Outbound International diversification ... 12
2.3 Interaction effect; firm size ... 15
2.3.1 Firm size and product diversification ... 16
2.3.2 Firm size and outbound international diversification ... 19
3. METHODOLOGY ... 22 3.1 Data ... 22 3.1.1 Country Sample ... 22 3.1.2 Firm Sample ... 26 3.2 Variables ... 26 3.2.1 Dependent Variable ... 26 3.2.2 Independent Variables ... 26 3.2.3 Control Variables ... 27 3.3 Analysis ... 27 4. RESULTS ... 30 5. DISCUSSION ... 35
6. LIMITATIONS AND SUGGESTIONS FOR FUTURE RESEARCH... 39
1. INTRODUCTION
Firms engage in strategic corporate diversification by diversifying their products and/or geographical markets, in order to grow and enhance their performance. Diversification can be split up into product- and outbound international diversification, where products are improved or newly created and new markets abroad are penetrated, respectively. The relationship between strategic corporate diversification and firm performance is one that has been studied extensively over the last decades. According to Chatterjee and Wernerfelt (1991), it is perhaps the most researched linkage in the strategic management literature. Although the research on the strategic corporate diversification-performance relationship is vast, current studies on this relationship have not generated consistent findings and research has not yet led to a general consensus concerning the nature of key relationships. An evaluation of the current literature on this relationship by Palich, Cardinal and Miller (2000) suggests that there are still opportunities for further research regarding this topic.
Current literature describes the relationship between diversification and performance, in most cases, as curvilinear, or similarly as an inverted U-shaped model. The study by Palich, Cardinal and Miller (2000), provides support for the curvilinear model; i.e. performance increases as firms shift from single-business strategies to related product diversification, but performance decreases as firms change from related product diversification to unrelated product diversification and that moderate levels of product diversification yield higher levels of performance than either limited or extensive product diversification. The OECD1 defines that related product diversification occurs when the firm expands into similar product lines, as opposed to unrelated product diversification, when the products are very different from each other. Tallman and Li (1996) also found a curvilinear relationship between product diversity and performance, suggesting that they are positively related up to a point, after which increases in product diversity are associated with declining performance. These findings suggest that firms diversifying outside of their core business or competencies inherit increased costs that interfere with performance. However, the type of product diversification does not say anything about the markets where the products are sold, being either domestic or international.
Hitt, Hoskisson and Kim (1997) found that international diversification has a curvilinear relationship with performance. It appears that international diversification can produce economies of scale, scope and experience. However, the effects of international diversification eventually level off and become negative at high levels of international diversification.
the results also speak for SMEs2 remains uncertain. What will the results of a study be when using a sample that includes SMEs? Creating a sample with both SMEs and MNEs, will reveal if environmental munificence has the same effect on strategic corporate diversification and hence performance, for SMEs and MNEs.
What is so different between SMEs and MNEs that it is worth taking firm size into account in the strategic corporate diversification-performance relationship in different munificent home country environments? It is obvious that smaller firms are not smaller versions of big business (Shuman and Seeger, 1986). SMEs are characterized by limited resources, and whose small size magnifies the downside implication of an expansion activity (Lu and Beamish, 2001). Rather, they differ fundamentally from larger firms in ownership, resources, organizational structures and processes, as well as management systems (Smith et al., 1988). These differences could very well have an impact on the outcome of a SMEs’ ability to take full advantage of a more munificent home country environment or coping with disadvantages that come with a less munificent home country environment and the outcome of strategic corporate diversification.
Qian (2002) looks at SMEs in terms of product diversification and multinationality, or outbound international diversification. In terms of product diversification, because SMEs generally lack resources necessary to sustain a large-scale research and development operation, they should adopt a “deep niche” strategy. Firms need to carve out well-defined niche markets by concentrating on a few specialized products and services, and also establish cooperative relations (e.g., strategic alliances) with major domestic and foreign companies (avoiding significant investment of resources and saving unnecessary R&D3 spending). In terms of outbound international diversification, SMEs generally lack managerial talent with international expertise. And managerial constraints will increase with multinationality (Grant, 1987; Siddharthan and Lall, 1982). For those SMEs with previous little foreign involvement and international experience (i.e., inadequate geocentric mindset), the adoption of a proper strategy is a key to successful competition in the international arena.
This study builds on the study by Wan and Hoskisson (2003) but includes firm size as a moderator of the dual relationship between environmental munificence and
strategic corporate diversification (both product and outbound international) on performance. This study contributes to current literature by including a focus on SMEs. The expectation is that in comparison to MNEs, SMEs will act differently regarding strategic corporate diversification decisions in environments that are different in munificence. By focussing on SMEs in this study, and building on a model of MNEs’ strategic corporate diversification affected by environmental munificence as presented by Wan and Hoskisson (2003), it is expected that SMEs’ strategic corporate diversification decisions will have a different performance outcome when compared to the same decisions made by MNEs. This will result in new findings regarding effects of strategic corporate diversification on firm performance specific to SMEs, something that has been missing in the current literature. The following section will deal with the theoretical foundation and hypotheses and is followed by the methodology section. Next, the results are presented, followed by a discussion and limitations plus suggestions for future research, finally the conclusions are presented.
2. THEORY AND HYPOTHESES
2.1 Environmental munificence
and/or institutions, exhibit different characteristics. Environmental munificence can be defined in terms of factors and institutions, with factors, as opposed to institutions, being more tangible. Examples of tangible factors are the physical infrastructure available to a firm, examples of less tangible institutions are judiciary efficiency that facilitates transactions. As mentioned, factors are used to produce goods or services, and can be seen as transformational activities. Institutions are used for the exchange of inputs and outputs with other firms, and are regarded as transactional activities. The factors can be split into three categories, the endowed-, advanced- and human factors. Endowed factors constitute of natural resources, factors such as coal and oil. Advanced factors refer to a country’s physical infrastructure, capital goods accumulation and financial resources. Finally, a human factor is the quality of labour, which is built from the attainment of education. The quality of labour and education will assist a country’s ability to generate innovative ideas and products (Wan and Hoskisson, 2003).
Institutions can be split into three categories; political-, legal- and societal institutions. Political institutions are primarily related to the credibility and effectiveness of a country’s bureaucratic infrastructure and are the foundation for transactions. Legal institutions refer to the formal rules of how business transactions are conducted. These formal rules are supported by a judiciary system. The societal institutions refer to a country’s general levels of trust, cooperative norms, and associational activities (Knack & Keefer, 1997).
According to Castrogiovanni (1991), environmental munificence is regarded as one of the most important aspects for explaining strategic behaviours and outcomes. Wan and Hoskisson (2003) summarize the environmental munificence as focusing on the capacity of factors and institutions at the macro environmental level and see environmental munificence as the availability of crucial factors and institutions in a home country environment.
2.2 Strategic Corporate Diversification
useful strategic tool that managers can use in order to enhance firm performance and corporate growth (Pandya and Rao, 1998). The current literature speaks of two different types of diversification, product- and outbound international diversification.
2.2.1 Product Diversification
Hitt, Hoskisson and Kim (1997) describe product diversification as an expansion into product markets new to a firm. As a result of new customer expectations, such as higher quality and lower costs, firms must invest in innovation and new product development. Product diversification is a strategic option to create and sustain a competitive advantage; competitive advantage in turn depends on the ability of the firm to create products and process innovations. In order for the product diversification to be successful, it largely depends on the ability of the firm to use available resources and institutions (Wan 2005). Product diversification has different degrees of intensity and relatedness (Palich, Cardinal and Miller, 2000; Pandya an Rao 1998; Wan, 2005). They speak of firms that are low, moderate or highly diversified. Also, the diversification can also be related or unrelated to current products and processes of the firm.
Low product diversification is focusing on the core business of the firm. Firms would find it beneficial to pursue low levels of product diversification to stay focused and attain more specialized product-market expertise. Low product diversification places great emphasis on developing unique, critical capabilities (Wan 2005). High product diversification requires managers to monitor a wide variety of business and may deplete managers’ information-processing capacities and may be an undesirable strategy (Hill and Hoskisson, 1987).
other, i.e. diversifying into a different 2-digit SIC4 code industry. Unrelated strategies may present some unique advantages of their own derived primarily from financial synergies. Companies implementing unrelated diversification strategies hope to create value by realizing financial economies. Financial economies are cost savings and realized through internal capital allocations (that are more efficient than market-based allocations) and by purchasing other companies and then restructuring their assets.
Pandya and Rao (1998) show in their study that diversified firms show better performance compared to undiversified firms on both risk and return dimensions. They state that undiversified firms have higher returns but these are accompanied by higher variance. Higher diversified firms show lower returns but also lower variance. They conclude that a dominant undiversified firm may perform better than a highly diversified firm in terms of return but its riskiness will be much greater. Some claim that the economies in integrating operations and core skills obtained in related diversification outweigh the costs of internal capital markets and the smaller variances in sales revenues generated by unrelated diversification (Datta, Rajagopalan and Rasheed, 1991). Hitt, Hoskisson and Kim (1997) stress that unrelated product diversification particularly discourages R&D investment in internationally diversified firms, since essentially governance scope exceeds the managerial capabilities. This perspective focuses on information-processing and control problems (Hill and Hoskisson, 1987). Because of this excess scope, corporate executives shift from an emphasis on strategic controls to an emphasis on financial controls. Research shows that even small-to-moderate amounts of product diversification have a negative effect on R&D intensity (Hitt, Hoskisson and Kim, 1997). Product diversification leads to a shift from strategic to financial controls because of information asymmetries, information overload and inability to adequately understand the operations of each of the separate businesses competing in diverse markets. Wan and Hoskisson (2003) focused on several relationships between corporate diversification strategies and firm performance and suggested that these relationships are related to home country environments. Regarding product diversification, Wan and Hoskisson (2003) studied two relationships.
In case of product diversification in a relatively more munificent home country environment, firms often enjoy an abundant supply of factors and institutions. Healthy
supplies of institutions enable 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 unfamiliar, transacting parties (Eggertsson, 1990). Well developed societal institutions, such as cooperative norms and societal trust, facilitate inter- and intra-organizational cooperation (Putnam, 1993). Because firms are less concerned with opportunistic behaviours than they would be were the munificence of institutions lacking, they are not highly restricted as to types and numbers of exchange partners and thus can deal with the most efficient buyers or sellers (Greif, 1993). In case of high abundance in factors and institutions, firms have plenty of opportunities to constantly challenge each others competitive positions and facilitate new market entry (Specht, 1992). When competition is high, firms invest a lot in product competitiveness. In order to do so, the focus should be on a specific product in which there is a competitive advantage. In this case, product diversification would be an undesirable strategy, since it would result in spreading a firms’ focus over a range of products and losing their competitive advantage in one product (Hill and Hoskisson, 1987). In a more munificent home country environment the sources of competitive advantage 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 (Wan and Hoskisson, 2003). Low product diversification, which characterizes developing unique, critical capabilities, is likely to enhance firm performance (Wan and Hoskisson, 2003).
Hypothesis 1: In more munificent home country environments, product diversification is negatively related to firm performance.
Hoskisson, 1987). Besides, high product diversification increases a firms’ overall attractiveness as a borrower, because of lower default risks for a lender; this is beneficial to firms’ reputation as well. Also, talent is generally in shorter supply in these environments, compared to more munificent environments. Diversified firms, because of their reputations and business scope, can attract talent and develop robust internal labour markets to put such talent to its best use across different types of business (Khanna and Palepu, 1997).
The existence of a diversified corporate structure may also compensate for relatively low reliability of institutions in these environments. For example, opportunistic behaviours can be more efficiently monitored and sanctioned by hierarchical authority (Williamson, 1975). Furthermore, the government in less munificent environments usually assumes a more active role in the economy. Diversified firms’ scope and influence in many sectors of the economy are likely to foster close ties between them and the government, ties that allow them to enjoy idiosyncratic state favours (Wan and Hoskisson, 2003). Their unique, flexible capabilities in establishing government relationships are often not restricted to any specific product-market, which allows them to virtually “reproduce” themselves in many different businesses (Whitley, Henderson, Czaban and Lengyel, 1996). Firms thus can extend their competitive advantages mainly by erecting institutional barriers to entry in many product-markets, by, for instance, changing “the rules of the game” through lobbying (Hillman and Hitt, 1999).
Hypothesis 2: In less munificent home country environments, product diversification is positively related to firm performance.
2.2.2 Outbound International diversification
Reasons for firms to diversify internationally is that they become able to integrate across country borders by standardizing products, rationalizing production, and coordinating critical resource functions such as R&D (Kobrin, 1991). Arising opportunities are, among others, economies of scale and scope, and learning (Kogut, 1985), exploiting the relationships among business segments and geographic areas (Porter, 1985), sharing distinctive firm capabilities or core competences across business units (Hamel, 1991; Porter, 1990) and exploiting differences in factor markets (Porter, 1990). Thus, outbound international diversification provides greater opportunities to achieve optimal economic scale and to amortize investments in critical functions such as R&D and brand image over a broader case. Outbound international diversification offers several advantages to a firm. For example, some have argued that outbound international diversification offers prospective market opportunities (Buhner, 1987). Thus, it offers the opportunity for greater firm growth. However, the most prominent argument offered in the literature is that outbound international diversification provides the opportunity to exploit the benefits of internalization (Rugman, 1981). Performing activities internally has several benefits; among them exploiting the relationships among business segments and geographic areas (Porter, 1985), sharing distinctive firm capabilities or core competences across business units (Hamel, 1991; Porter, 1990) and exploiting differences in factor markets (Porter, 1990). These characteristics of outbound international diversification are derived primarily from the resource-based view of the firm. Economies of scale gained through outbound international diversification allow firms to increase their efficiency. Also, increased learning and innovation result from economies of scope gained through outbound international diversification (Kochlar and Hitt, 1995).
barriers to the transfer of competitive advantages across country borders (Kogut, 1985). Factors’ costs (e.g., wages, capital charges) may vary considerably across countries and these differences greatly increase the risk associated with decisions to allocate resources across the various product markets in which a firm operates (Hitt, Hoskisson and Kim, 1997). Information-processing demands are more complex and greater when firms move into new international markets than when they move into different product markets within the same domestic setting. In other words, the internal governance costs exceed the benefits provided by the economies achieved and thus, the range of resources used and scope of governance exceeds managerial capabilities. Of course, the point at which this occurs will vary with the managerial skills captured within in a firm.
Several studies (Daniels and Bracker, 1989; Grant, 1987; Haar, 1989; Kim Hwang and Burgers, 1993; Vernon, 1997) found a positive relationship between outbound international diversification and firm performance. From these studies there may be good reasons to believe that moderate levels of outbound international diversification provide multiple benefits to an organization, yet there are also some significant costs associated with outbound international diversification that will depress firm performance.
Wan and Hoskisson (2003) argue that in more munificent countries, firms will be able to exploit their current advantages by engaging in outbound international diversification. Because of heavy competition in the home country, firms will sharpen their competitive edge, combined with abundant institutions; firms will be able to protect their acquired and unique skills (Teece, 1996). These efficient firms will probably acquire the less efficient firms, which will construct a solid base for becoming a potent global competitor. With this theory in mind, Wan and Hoskisson (2003) argue that in more munificent home country environments, outbound international diversification is positively related to firm performance. So in general, firms located in more munificent environments are better able to redeploy their skills and capabilities, which lead to the third hypothesis.
Firms situated in less munificent home country environments can also pursue outbound international diversification, either to realize better returns or to seek foreign inputs or simply to find more favourable business locations (Wan and Hoskisson, 2003). However, most firms in less munificent environments lack globally redeployable capabilities for successfully competing in foreign markets. For instance, insufficient factors limit these firms’ ability to develop world-class technologies. Relatively lax antitrust enforcement implies that many product-markets are dominated by less innovative incumbent firms because challenges from new entrants are weak and infrequent. Dominant firms are likely to compete largely on the basis of institutional advantages, such as social ties with the government or ability to limit entry through regulatory constraints (Hilman and Hitt, 1999). A firm from a less munificent environment can, for example, enjoy a privileged treatment at home, but their institutionally based competitive advantages are in many ways local and seem to disappear when these firms move abroad. It seems that outbound international diversification will not improve firm performances in environments with little munificence it might even weaken these firms since they will be out competed in the global market (Wan and Hoskisson, 2003).
Hypothesis 4: In less munificent home country environments, outbound international diversification is negatively related to firm performance.
2.3 Interaction effect; firm size
resources, and their smaller size magnifies the downside implications of an expansion activity. Although the economic significance of SMEs is not as great as the importance of MNEs in respect to both product- and outbound international diversification, SMEs have become increasingly global in recent years by expanding their product offerings and geographic markets (Karagozoglu and Lindell, 1998). Prior findings on performance effects of multinationality and product diversification relate to very large firms from the US and Europe (Geringer et al., 1989). According to Qian (2002), a potential fruitful avenue for further research would be to test the relevance of these results for a sample of SMEs. Studying SMEs instead of solely MNEs will reveal whether SMEs can benefit in the same way that MNEs benefit from a more munificent home country environment. This requires a focus on firm size and an investigation whether firm size might moderate the dual relationship between environmental munificence and strategic corporate diversification on performance.
2.3.1 Firm size and product diversification
SMEs also suffer the disadvantage in conducting R&D because of the inherent risks (Acs and Audretsch, 1990; Rothwell and Zegveld, 1982). These risks can be spread out by MNEs, if a research project in a MNE does not result in what the project leaders had hoped for, its outcome may still be beneficial to the firm because of its greater diversity of production. The diversity of production of SMEs is much smaller, which means that R&D projects are in general focused on the improvement of a single product. If this project does not live up to expectation, the possibility of using it on another product line is much smaller for SMEs; therefore the whole project is considered a loss to the firm. These risks are substantially larger for SMEs than for MNEs.
Because of these disadvantages, which SMEs have to deal with, even in a more munificent environment, SMEs should carve out well-defined niche markets by concentrating on a few specialized products and services (Qian, 2002), so product diversification might not be the best option. Wan and Hoskisson (2003) stress that concentrating on a few specialized products and services is also the best strategy for MNEs that originate from a more munificent environment. However, Wan and Hoskisson (2003) reason that MNEs should focus on low levels of product diversification because in more munificent environments, MNEs have plenty of opportunities to constantly challenge one another’s competitive positions and facilitate new market entry (Specht, 1992), competition is intense, and firms are compelled to devote significant amounts of attention to increasing product competitiveness. This fierce competition also applies to SMEs and because of their size and lack of resources and ability to benefit from more munificent environments in the way that MNEs do, the negative effects of product diversification on firm performance will be stronger for SMEs than for MNEs.
Hypothesis 5: In more munificent home country environments, the negative effect of product diversification on firm performance is stronger for SMEs than for MNEs.
environments? Wan and Hoskisson (2003) stressed that firms situated in less munificent home country environments would wish to pursue higher levels of product diversification to create substitutes for factors and institutions. Several studies (Hill and Hoskisson, 1987; Hillman and Hitt, 1999; Khanna and Palepu, 1997; Whitley, Henderson, Czaban and Lengyel, 1996; Williamson, 1975) give examples of how product diversification can compensate and substitute for the lack of factors and institutions that comes with less munificent environments. As described earlier, these examples are becoming more attractive as a borrower, attracting talent using the firms’ reputation and business scope, lobbying with the government and erecting institutional barriers to entry in many product-markets. However, these examples are addressed to MNEs only. Can a SME attract talent, or put pressure on a government just as easily as a MNE can? Theory suggests that SMEs in contrast to MNEs have limited resources and face more constraints (Shuman and Seeger, 1986). Large businesses appear to possess certain resources and capabilities that allow them to overcome some traditional barriers as well as provide them with advantages which help them exploit certain industry characteristics. These findings are consistent with assertions that large firms possess large financial and human resources and the ability to compete on broad-based strategies and reputation, to exploit patents and to exert bargaining power over suppliers and costumers (Dean, Brown and Bamford, 1998).
Hypothesis 6: In less munificent home country environments, the effect of product diversification on firm performance is positive for MNEs, yet negative for SMEs.
2.3.2 Firm size and outbound international diversification
SMEs and MNEs differ fundamentally from each other in ownership, resources, organizational structures and processes, as well as management systems (Smith et al., 1988). These differences could very well have an impact on the outcome of SMEs internationalization. Although participation in foreign activity is not the domain of large firms only, they generally have greater ownership advantages than SMEs. This is because large firms have more resources at their disposal to allow them to strengthen their R&D activities and are more likely to achieve economies of scale (Anderson and Schmittlein, 1984). Comparatively, SMEs have difficulties in achieving economies of scale, thus resulting in a cost disadvantage with their large competitors. SMEs can turn out to be losers in global competition if they are unable to grow quickly to apply innovations to large-scale production (Acs et al., 1997). On the one hand, international markets can be very attractive for SMEs as they represent significant opportunities for growth (Lefebvre et al., 1998). On the other hand, as global competition intensifies, many SMEs must adopt international perspectives (Litvak, 1990). Even the SMEs with primary domestic orientation should be internationally competitive in order to secure a long-term success (Wright and Ricks, 1994).
to cope successfully with greater complexity (Grant, 1987). Internationalizing SMEs may stretch management capabilities to the extent that it could depress overall performance. Reversely, MNEs generally have more capital to compensate for higher operation costs and have easier access to managers that fit the job.
Several studies, (Buhner, 1987; Grant, 1987; Kimet et al., 1993 and Qian, 1996) show that there is a positive relationship between outbound international diversification and SME performance. The differences between SMEs and MNEs regarding outbound international diversification lead to the seventh hypothesis.
Hypothesis 7: In more munificent home country environments, the positive effect of outbound international diversification on performance is stronger for MNEs than for SMEs.
When firms originate from less munificent home country environments, it is expected that outbound international diversification has a negative effect on the performance. Does this also apply to SMEs?
The possible influence of regional differences and increased costs of coping with great complexity may reduce the potential benefits associated with increased scope of foreign operations (Grant, 1987; Geringer et al., 1989). Increased foreign operations will result in both advantages and constraints. Managerial and resource constraints will increase with a firms’ foreign involvement (Qian, 2002). This is because increased foreign operations will increase the requirements on coordination and communication among different units of firms and with other parties located in different overseas markets. The coordination sometimes becomes extremely difficult and firms that engage heavily in foreign activity will experience increasingly transaction costs (Hitt et al., 1997).
Wan and Hoskisson (2003) state that MNEs in less munificent countries lack globally redeployable capabilities for successfully competing in foreign markets and that their institutionally based competitive advantages at home, are in many ways local and seem to disappear when these firms move abroad.
International markets can be very attractive for SMEs as they represent significant opportunities for growth (Lefebvre et al., 1998). International markets will provide additional factors and institutions that are lacking in the home country. SMEs with primary domestic orientation should be internationally competitive in order to secure a long-term success (Wright and Ricks, 1994). As SMEs internationalize their chances of achieving competitive advantages increase, an advantage that does not arise from product diversification in less munificent home country environments. Kaleka (2002) argues that the differences existing between foreign and domestic markets in terms of economic, legal, socio-cultural factors, etc., prompt companies to implement different strategies in each of these markets, which may allow them to obtain different competitive advantages in these two business scenarios. The selection of countries that are geographically and/or culturally similar can reduce uncertainty in decision-taking and encourage more proactive attitudes on the part of SMEs towards the development of their international businesses (De Luz 1993). However, once SMEs have consolidated their position in these countries, they should try to diversify markets in order to minimize the dependency of sales, growth, or profitability on exports in one or a few countries’ markets (Navarro 2002). Authors who analyse the benefits of market diversification strategies (Aulakh, Kotabe, and Teegen 2000) argue that these allow companies to minimize risks, cover larger markets, access greater economies of scale, have access to greater accumulated know-how on foreign markets, and obtain greater profitability from the organization’s competitive advantages. This leads to the final hypothesis.
3. METHODOLOGY
3.1 Data
To test the above hypotheses, the two stages of sample construction by Wan and Hoskisson (2003) were applied and customized to fit the hypotheses. The first stage yielded a sample of countries, from which a firms sample was constructed in the second stage.
3.1.1 Country Sample
The initial country sample was drawn from European countries. Reasons for picking European countries are that within Europe itself, there is a clear difference in environmental munificence among countries. Second, access to a database containing only European firms was acquired, which was decisive for drawing a country sample from European countries. In order to adequately measure environmental munificence, factor and institution components of each country were measured. These factors and institutions consist of endowed-, advanced- and human factors and political-, legal- and societal institutions. Each with their own set of variables. See table 1. The country sample data collection is a combined effort from three different sources. Both Worldbank5 and Word Development Indicators6 were the main suppliers of data. To finalize the dataset, data from Geert Hofstede’s Cultural Dimensions7
and the OECD Extracts were also obtained. The data used is from the year 2005, simply because this year contained the most available data for both country and firm sample.
The variables mentioned in table 1 are all described as quantitative data. All variables are ordinal data, measured on the ratio scale, since all variables do indicate both rank and distance from a natural zero. The variable agricultural land is a percentage of the total land. The variable total labour force is the total number of people active in the labour force of that particular country. R&D expenditure is
5 www.worldbank.org 6
World Development Indicators are captured in a database provided by the University of Groningen and published by the World Bank.
measured as a percentage of GDP. Total Rail lines is the total number of tracks in kilometres. The amount of railway goods transported is measured in million tons transported per kilometre. The percentage roads paved is the percentage of total roads that are paved, with total roads, either paved or not paved measured in kilometres. Similar to the railway goods transported, the air transport freight is measured in millions tons of freight per kilometre. Both labour force secondary and tertiary is a percentage of the labour force that has had either secondary or tertiary education. The number of researchers is the amount of researchers per 1000 employed. All variables that are part of the institutions are measured on a scale from 1 to 100, with 1 being the lowest possible score and 100 the highest. The political- and legal institutions are drawn from the governance indicators as provided by the World Bank. These indicators measure the quality of governance, the higher the score the higher the quality of governance. The political stability measures the predictability and reliability of the government, a low score would indicate political turmoil. Control of corruption measures the degree to which corruption is perceived to exist among businesses, public officials and politicians. Government effectiveness measures to what the extent the government is a well-functioning system of organizations delivering needed services effectively and economically. Voice and accountability measures the extent to which a country’s citizens are able to participate in selecting their government. The rule of law measures to what extent that nobody is above the law. Finally, regulatory powers measures the compliance with laws, regulations and established rules.
The choice of including four cultural dimensions of Geert Hofstede is that high scores on these dimensions will result in higher scores on the societal institutions. Individualism captures how in individualist cultures, people are expected to develop and display their individual personalities and to choose their own affiliations. Wealthy cultures tend to be more individualistic whereas poor cultures tend to be more collective. Masculinity addresses how in so-called “masculine” cultures, people (whether male or female) value competitiveness, assertiveness, ambition, and the accumulation of wealth and material possessions. For countries with high uncertainty avoidance, these cultures tend to be those that are modernizing and have rules to control social behaviour which will benefit economic stability.
were standardized before summing and averaging them within six groupings, each represents either one of the three components of factors (endowed factors, advanced factors and human factors) or one of the three components of institutions (political institutions, legal institutions and societal institutions). The variables were standardized using the statistical package STATA. A standardized variable (sometimes called a z-score or a standard score) is a variable that has been rescaled to have a mean of zero and a standard deviation of one. For a standardized variable, each case's value on the standardized variable indicates its difference from the mean of the original variable in number of standard deviations (of the original variable). Standardizing a variable is a relatively straightforward procedure. First, the mean is subtracted from the value for each case, resulting in a mean of zero. Then, the difference between the individual's score and the mean is divided by the standard deviation, which results in a standard deviation of one. Starting with a variable x, and generate a variable x*, the process is: x* = (x-m)/sd. Where m is the mean of x, and sd is the standard deviation of x.
TABLE 1
Country Environment Variables Used for Country Classification
Components Variables Data Sources
Factors
Endowed Agricultural Land
Total Labour Force
World Bank
World Development Indicators
Advanced R&D Expenditure
Total Rail lines
Railway Goods Transported PercentAge Roads Paved Total Roads (in KM) Air Transport Freight
OECD Extracts
World Development Indicators
Human Labour Force Secondary
Labour Force Tertiary Number of Researchers
World Development Indicators OECD Extracts
Institutions
Political Political Stability Control of Corruption Government Effectiveness Voice and Accountability
World Bank
Legal Rule of Law
Regulatory Power
World Bank
Societal Power Distance Index
Individualism Masculinity
Uncertainty Avoidance
Cultural Dimensions by Geert Hofstede
3.1.2 Firm Sample
Firms covered in the Amadeus Database8 were used for the initial sample. Similar to the country sample, data from the year 2005 was used because this year yielded the most available data. The search result met four criteria. First the firm sample is limited to firms having their core activities in either the manufacture of chemicals and chemical products industry or the manufacture of machinery and equipment. This is done to minimize the heterogeneity of industry effects. Second, only active firms were used. Third, the minimum percentage ownership of a foreign subsidiary is set to 10%. Finally, in order to make a distinction between a MNE and SME, firms that employ 500 or less were considered a SME and firms that employ 500 or more were considered a MNE (Mahone, 1991; Karlsson and Olsson, 1998). The final sample consists of 285 firms in total. 151 (64 SMEs & 87 MNEs) originated from one of the more munificent countries mentioned above, 134 (79 SMEs & 55 MNEs) originated from one of the less munificent countries.
3.2 Variables
3.2.1 Dependent Variable
Our dependent variable was earnings before interest and taxes (EBIT) and our measure of performance. Because taxation rules as well as capital structure are likely to differ among countries, EBIT is a useful performance measure in cross-country studies.
3.2.2 Independent Variables
Product diversification was captured by assessing the number of different industries a firm is active in. This is done by looking at the number of different four-digit SIC codes. A firm is always active in its core industry and starts product diversifying when it enters a new primary or secondary industry.
Some researchers use the total number of foreign countries where a firm has subsidiaries or the total number of foreign subsidiaries as a proxy for outbound
8 The Amadeus Database contains financial information and business intelligence on over 14 million
international diversification (Barkema and Vermeulen, 1998). In this case, the number of foreign countries where a firm has subsidiaries was chosen to capture outbound international diversification.
The variable Employees, which measures the number of people employed at a firm, was included to capture firm size. Firms with substantially more people employed are likely to be considered a large firm.
3.2.3 Control Variables
Four control variables were included. The Age variable controls for firm experience. It is likely that older firms enjoy more experience in either type diversification since they have become more experienced in dealing with the risks that come with both types of diversification. Another experience related variable is EUsubs. It controlled for the level of internationalization in the sense that if the parent firm is an EU firm, and most of its subsidiaries are also located in the EU, than the risk of outbound international diversification is less for that firm, when compared to a firm that has diversified outside the EU. EUsubs is a dummy variable and takes on the value 1 if at least 50% of the subsidiaries are located within the EU. The final two control variables regard the assets a firm possesses. LNassets is the log of the total assets a firm has. Perc_Assets is the percentage of intangible assets divided by the total assets. The Perc_Assets controlled for international competitiveness. Investing in intangible assets would make the firm (internationally) more competitive.
In general, larger firms have more resources (Barkema and Vermeulen, 1998) and would be better able to set up diversification projects and cover risks that arise from product diversification or outbound international diversification, the logarithm of total assets controls for this.
3.3 Analysis
After summing the values of the factors and institutions and taking the average, the scores on environmental munificence become apparent. Now, the firm sample can be categorized to either a more or less munificent home country environment.
other consists only of firms that originate from less munificent home country environments. To test the hypotheses, several OLS9 multiple regressions were run in order to answer the hypotheses and note differences between firms that originated from different munificent home countries. The OLS multiple regressions are run according to three equations.
MODEL A/D:
EBIT = ß0 + ß1* LNassets + ß2* Perc_Assets + ß3* Age + ß4* EUsubs
MODEL B/E:
EBIT = ß0 + ß1* LNassets + ß2* Perc_Assets + ß3* Age + ß4* EUsubs + ß5* Prod_Div + ß6* Int_Div + ß7* Employees
MODEL C/F:
EBIT = ß0 + ß1* LNassets + ß2* Perc_Assets + ß3* Age + ß4* EUsubs + ß5* Prod_Div + ß6* Int_Div + ß7* Employees + ß8* Prod_div_ Size + ß9* Int_Div_Size
The models A, B and C are applied to the more munificent home country environments firm sample and the models D, E and F are applied to the less munificent home country environment firm sample.
Model A/D is the base model and contains only the control variables, the log of total assets (LNassets), the percentage intangible assets of total assets (Perc_Assets), the Age of the firm (Age) and a dummy variable if at least 50% of its subsidiaries are located within the EU (EUsubs). In the second model, model B/E the main effects on the independent variables are introduced; product diversification (Prod_Div), outbound international diversification (Int_Div) and the number of employees (Employees) which captures firm size. Model C/F is the final model, which introduces the interactions. The interactions are created by letting both the product diversification
(Prod_Div) and outbound international diversification (Ind_Div) interact with the Employees variable. The Employees variable was split and categorized in order to create a distinction between SMEs and MNEs based on the number of employees. Firms with 500 or less employees are regarded as SMEs and firms with 500 or more employees are regarded as MNEs. This categorized version of Employees combined with both the Prod_Div and Int_Div variable led to the interaction variable size and product diversification (Prod_Div_Size) and the interaction variable size and outbound international diversification (Int_Div_Size), which will demonstrate the effect of firm size on strategic corporate diversification. By building on the base model by including the independent variables and eventually the interaction variables, the model will show improvements by, for instance a rise in the R². Another plausible way for testing whether the new model has improved is by conducting a test of the overall significance of the regression model by doing an F-test. A third option is a partial correlation analysis which is important when studying linear relationships between more than two variables and studying three variables instead to shed light on the impact of the third variable on the relationship under study.
4. RESULTS
The means, standard deviations and correlations for the variables used for the two firm samples are separately presented in table 2. There was no multicollinearity problem in de models, as is shown in appendix A, all variance inflation factors (VIF) are well below 5, and the mean of all variance inflation factors is not larger than 1 (Chatterjee and Price, 1991). However the correlations table does show some highly correlated variables. Two variables in the correlations table are more frequent than others involved in the high correlations. Both Employees and Total Assets (in log) correlate highly with each other and others. Firm size is based on the Employees variable, and a large amount of total assets is often a characteristic of a large firm, this in turn might explain the high correlation between these two variables and the EBIT variable, since larger firms often have higher earnings. The high correlations in the interaction variables, Product Diversification * Firm Size and Outbound International Diversification * Firm Size can be explained by the fact that these interaction variables are generated using the Employees variable, which in turn explains the correlation of these interaction variables with the Total Assets (in log) variable. Although there are some high correlated variables none of the variables in the correlations table come close to perfect collinearity, which rules out the possibility of violating the OLS assumption.
When testing the variance inflation factors for each of the six regression models with the statistical package STATA, each model passed the check for multicollinearity. OLS multiple regression analyses was the main tool used to test the eight hypotheses. To provide additional proof in answering the hypotheses, centered
Discriptive Statistics and Correlations: Less Munificent Home Country Environments
Variable Mean s.d n. 1 2 3 4 5 6 7 8 9 10
1. EBIT 9133.396 20610.83 134 1.000
2. Product Diversification 2.791045 4.460477 134 0.5288 1.000
3. Outbound International Diversification 3.544776 5.051041 134 0.3640 0.0191 1.000
4. Total Assets (in log) 10.23168 1.899441 134 0.6180 0.1296 0.5239 1.000
5. Percentage Intangible Assets 4.34709 6.640567 134 -0.0151 -0.1011 0.1706 0.1019 1.000
6. Age 31.79851 24.617 134 -0.0053 -0.0923 -0.1258 0.0775 -0.1984 1.000
7. Employees 513.7761 912.0087 134 0.6634 0.0602 0.4403 0.7333 -0.0036 0.1360 1.000
8. EUsubs .7238806 .4487542 134 0.0101 0.1325 -0.1985 -0.0060 -0.1912 -0.0691 -0.0238 1.000
9. Product Diversification * Firm Size 1.425373 2.514251 134 -0.2417 0.3888 -0.2469 -0.4894 -0.1062 -0.0883 -0.2913 0.0782 1.000
10. Outbound International Diversification * Firm Size .8208955 .9565818 134 -0.3643 -0.0828 -0.2769 -0.6290 0.0155 -0.4393 -0.4393 -0.0285 0.3227 1.000
Discriptive Statistics and Correlations: More Munificent Home Country Environments
Variable Mean s.d n. 1 2 3 4 5 6 7 8 9 10
1. EBIT 157388.3 627142.6 151 1.000
2. Product Diversification 3.503311 2.604801 151 -0.0301 1.000
3. Outbound International Diversification 10.60927 14.52583 151 0.6470 0.2366 1.000
4. Total Assets (in log) 11.41781 2.592926 151 0.4565 0.3839 0.7386 1.000
5. Percentage Intangible Assets 8.894106 12.95293 151 0.2087 0.2327 0.2685 0.4182 1.000
6. Age 42.50331 33.56881 151 0.2834 0.2429 0.3437 0.3742 0.2360 1.000
7. Employees 5102.483 11685.47 151 0.7595 0.1740 0.6791 0.6493 0.2499 0.3665 1.000
8. EUsubs .6821192 .4672025 151 -0.2321 -0.0923 -0.3239 -0.2623 -0.2252 -0.3187 -0.2598 1.000
9. Product Diversification * Firm Size .9801325 1.533928 151 -0.1604 -0.0342 -0.4085 -0.6089 -0.2906 -0.2643 -0.2759 0.2144 1.000
10. Outbound International Diversification * Firm Size .6092715 .9163224 151 -0.1671 -0.3276 -0.3977 -0.6199 -0.2836 -0.1975 -0.2871 0.1595 0.5446 1.000
Appendices A and B contain all regression results plus the variance inflation factors for each regression and the graphs. The regression results for each model are displayed in table 3 and table 4. Results show that, that starting with the base model and adding the independent- and interaction variables creates a well improved model. In table 3 the R²10 in the final model is nearly three times the size when compared with the base model. In table 4, the R² has almost doubled when comparing model D with model F. It shows that in both cases the final models have improved from the base model.
Models A, B and C in table 3 report regression results for firms that originate from more munificent home country environments. As hypotheses 1 and 3 predict, the coefficients in model B in table 3 show that there is a statistically significant negative relationship between product diversification and firm performance and a positive relationship between outbound international diversification and firm performance, for firms originating from more munificent home country environments. Hence, both hypotheses 1 and 3 are supported.
Similarly as above, models D, E and F in table 4 report results for the hypotheses that focuses on the less munificent home country environments. Hypothesis 2 predicts a positive relationship between product diversification and firm performance in less munificent home country environments. This relationship is statistically supported, as can be seen in model E in table 4. Hence, hypothesis 2 is supported. There is no support for hypothesis 4, since the coefficient outbound international diversification in model E in table 4 is statistically insignificant.
10
More Munificent Home Country Environments
Dependent Variable Model A: EBIT Model B: EBIT Model C: EBIT
Total Assets (in log) 94920.34 ** -52682.85 * -3701.35
(20468.53) (20182.33) (25298.21)
Percentage Intangible Assets -104.49 3469.62 3701.35
(3910.29) (2629.95) (2621.98) Age 1991.92 453.8 689.21 (1511.64) (1030.66) (1035.41) Eusubs -128343.4 15602.84 6942.54 (104827.1) (71310.6) (71191.67) Product Diversification - -41345.01 ** -50087.48 ** (12870.88) (13803.22)
Outbound International Diversification - 16727.21 ** 16614.84 **
(3428.92) (3417.481)
Employees - 34.56 ** 33.09 **
(3.77) (3.88)
Product Diversification * Firm Size - - 50674.01†
(28182.6)
Outbound International Diversification * Firm Size - - -19050.17
(45133.53) Constant -922582.2 ** 489168.7 * 253802.9 (243750.1) (202595) (280201) N 151 151 151 R² 0.2311 0.6646 0.6721 F 10.97 40.48 32.12
ª Standard errors are in parentheses.
† p < .10
* p < .05
** p < .01
TABLE 3
Main & Interaction Effects ª
Less Munificent Home Country Environments
Dependent Variable Model D: EBIT Model E: EBIT Model F: EBIT
Total Assets (in log) 6874.46 ** 1991.27 * -493.12
(752.07) (842.11) (970.26)
Percentage Intangible Assets -298.57 -14.73 -8.83
(223.79) (160.99) (143.85) Age -62.08 -35.38 -37.28 (59.26) (43.51) (38.72) Eusubs -442.68 -1743.97 -1334.57 (3230.05) (2364.66) (2105.33) Product Diversification - 2197.265 ** 2948.01 ** (231.8) (13803.22)
Outbound International Diversification - 123.08 166.28
(247.77) (220.91)
Employees - 11.11 ** 12.52 **
(1.65) (1.49)
Product Diversification * Firm Size - - -2868.52 **
(484.55)
Outbound International Diversification * Firm Size - - 493.3
(1210.21) Constant -57611.63 ** -21068.62 ** 4803.3 (8260.26) (7875.35) (9934.77) N 134 134 134 R² 0.3933 0.7021 0.7679 F 20.91 42.42 45.57
ª Standard errors are in parentheses.
† p < .10
* p < .05
** p < .01
TABLE 4
Main & Interaction Effects ª
Accordingly, hypothesis 5, which predicts a stronger negative effect of product diversification on firm performance for SMEs, than for MNEs, can not be supported. Model C in Table 3 provide results that are the opposite of what the hypothesis predicts. On the basis of the results from model C in table 3 there is no support for the fifth hypothesis.
depicts an upward sloping line for MNEs and a downward sloping line for SMEs. Both model F in table 4 and graph 1 in appendix B provide support for accepting hypothesis 6.
Hypothesis 7 predicts that in more munificent home country environments, the positive effect of outbound international diversification on performance is stronger for MNEs than for SMEs. Model C in table 3 reports a negative sign for the interaction variable outbound international diversification and size for SMEs. Unfortunately this coefficient is statistically insignificant.On the basis of the regressions results from model C in table 3, the seventh hypothesis cannot be fully supported. The regression results suggest that outbound international diversification is positively affecting MNE performance. It can be said that the positive effect of outbound international diversification on firm performance is stronger for MNEs.
Hypothesis 8 states that in less munificent home country environments, firm size moderates the relationship between outbound international diversification and performance in such a way that it becomes negative for MNEs, yet positive for SMEs. The outbound international diversification variable was centered, to be able to graphically plot the interactions. Predicting a SMEline and a MNEline yielded a graph that depicts two upward sloping lines, see graph 2 in appendix B. Both suggest a positive effect on performance as a result of outbound international diversification. However the graph is plotted based on the insignificant positive interaction variable of model F in table 4. The part of hypothesis 8 that predicts a negative relationship between outbound international diversification and performance for MNEs is not accepted. The part of hypothesis 8 that predicts a positive relationship between outbound international diversification for SMEs can not be accepted due to an insignificant coefficient. The eighth hypothesis cannot be supported.
5. DISCUSSION
successful in the study by Wan and Hoskisson (2003). Goal of this study is to explore whether product diversification and outbound international diversification affect firm performance differently according to firm size and environmental munificence. Not just focussing solely on MNEs but also focussing on SMEs will result in new findings regarding effects of strategic corporate diversification on firm performance specific to SMEs, something that has been missing in current literature. The empirical results support including SMEs in this study, since effects by strategic corporate diversification on performance differ substantially between SMEs and MNEs.
This study supports that product diversification is negatively related to performance in more munificent home country environments but positively related to performance in less munificent home country environments. When placing the emphasis on firm size, results indicate, as predicted, that in less munificent home country environments, the effect of product diversification on firm performance is positive for MNEs, yet negative for SMEs. It seems that SMEs clearly struggle with their ability to cope with government regulations and attracting skilled labour (Rothwell and Zegveld, 1982). SMEs lack resources that are necessary to compensate for the absent factors and institutions in a less munificent home country environment. As opposed to SMEs, MNEs are able to compensate for these absent factors and institutions. MNEs can become attractive borrowers, attract talent using the firms’ reputation and business scope, lobbying with the government and erecting institutional barriers to entry in many product-markets. Hence, in less munificent home country environment, product diversification harms SME performance, but benefits MNE performance.
because of the inherent risks (Acs and Audretsch, 1990; Rothwell and Zegveld, 1982) and lack necessary resources (Qian, 2002). These difficulties contribute to product diversification having a negative effect on SME performance, according to theory. If theory predicts a negative effect, then how come the empirical results predict a positive effect? SMEs have been credited with increasing flexibility in production (Fiegenbaum and Karnani, 1991) and price (MacMillian et al., 1982) and with enhancing speed (Katz, 1970) and risk-seeking behaviour (Hitt, Hoskisson and Harrison, 1991; Woo, 1987). Rothwell and Zegveld (1982) claim that SMEs are more flexible and less bureaucratic and are able to react quickly and efficiently to both market en technological changes. The ability of SMEs to react quickly these changes might mean that they are able to diversify and market products much quicker than MNEs. Also, due to size restrictions, SMEs will generally have, if any, a much smaller R&D department compared to MNEs. SMEs will therefore probably diversify into related businesses more frequently instead of diversifying into a new unrelated business. Palich, Cardinal and Miller (2000), found that diversifying into related businesses improves firm performance, diversifying into unrelated businesses does not. However, these empirical results may not be generalizable to all SMEs since the SMEs in the sample are drawn from two different industries; the manufacture of chemicals and chemical products industry or the manufacture of machinery and equipment. This study did not focus on the relatedness of the product diversification but examined product diversification as the amount of different industries a firm is active in. Although several studies (Hitt, Hoskisson and Kim, 1997; Palich Cardinal and Miller, 2000) did place an emphasis on related- and unrelated product diversification and found that either affects performance or R&D differently, these studies did not include moderating effects such as environmental munificence and firm size into their studies. This study initially provides an answer as to how product diversification, either negative or positive, affects firm performance in a certain setting, i.e. influenced by firm size and environmental munificence. Once it is justified to include both environmental munificence and firm size as moderators of the product diversification-performance relationship, the next step will be to see how relatedness of product diversification with the inclusion of the moderators, will affect the product diversification-performance relationship.
munificent home country environments, a negative relationship was predicted between outbound international diversification and firm performance. The results did not fully match the theory. The outbound international diversification variable was statistically insignificant and positive. Also, the value of the outbound international diversification was fairly small, compared to other important coefficients. Wan and Hoskisson (2003) pointed out that for firms in less munificent home country environments, although outbound international diversification does not hurt performance, it does not provide substantial benefits because most firms in these environments lack global competitiveness. The predicted stronger positive effect on MNE performance, compared to SME performance, in more munificent home country environments due to outbound international diversification was not fully supported by the empirical results. The results point out positive effects for MNEs, but evidence for positive effects, to a lesser extent, on SME performance was not found. The interaction variable outbound international diversification and size is negative, yet insignificant. Due to the insignificance of the coefficient, it is not possible to immediately state that outbound international diversification is indeed negatively affecting SME performance. Eventually the opportunities that arise for SMEs from diversifying internationally might be overshadowed by the lack of resources and international (managerial) experience (Sambharya, 1996). Besides this, The United Nations’ report on “Small and Medium-sized Transnational Corporations” (1993) suggests that, among developed countries with high outward foreign direct investment activities, small and medium size firms conduct disproportionately less outward foreign direct investment. SMEs are fairly new and inexperienced when it comes to outbound international diversification. Wright and Ricks (1994) argue that SMEs are investing in long-term success by diversifying internationally. Tallman and Li (1996) suggest that management experience and capabilities will increase, once SMEs move abroad. The possible negative effects in more munificent home country environments on SME performance, caused by outbound international diversification might become positive as international experience will increase.
also shows a positive relationship between outbound international diversification and performance for SMEs, yet the regression results show, though insignificant, a small positive coefficient. The interaction term in the graph is plotted using the interaction term that is insignificant. Caution is advised in interpreting the results of the graph, since the fact that these regression results provide statistically insignificant coefficients and have also been used for plotting the graph. Therefore, the answer of the eighth hypothesis remains uncertain.
The relationship between strategic corporate diversification and firm performance has been studied many times before. Wan and Hoskisson (2003) provided new insights by including environmental munificence. Their study suggested and found that relationships between corporate diversification strategies and firm performance differ in dissimilar home country environments. This new insight of including environmental munificence was yet to be applied on SMEs. This study found significant performance differences between SMEs and MNEs originating from either a more- or less munificent home country environments, as a result of strategic corporate diversification. Although the results did not provide support for each hypothesis, they did provide some interesting and statistically significant results, which justify the need and importance of including SMEs into strategic corporate diversification research.
6. LIMITATIONS AND SUGGESTIONS FOR FUTURE RESEARCH
This study found significant performance differences between SMEs and MNEs as a result of different strategic corporate diversification and environmental munificence. The results open the door for future research that should place more emphasis on SMEs and not just focussing solely on MNEs.
