Corporate Strategy and Subsidiary Performance: The Effect of Product and Geographic Diversification

Abstract

In this study, we argue that foreign subsidiaries may benefit from the corporate strategies of multinational enterprises (MNEs) in different ways in terms of knowledge transfer and strategic flexibility. From this viewpoint, we explore the relationship between product diversification and financial performance of their subsidiaries under the condition of MNE geographic diversification. Using panel data on foreign subsidiaries in European countries from 2006 to 2011, we find a U-shaped relationship between product diversification and subsidiary performance and the joint effect of product and geographic diversification. Given the importance of transition economies in international business today, we conducted a subsample test contrasting the results based on the transitional (Central and Eastern European) versus Western European countries. The contrasting results provide important implications for other transition economies like China. We validate the relationship in several ways in our robustness tests.

Knowledge flows, strategic motives and innovation performance: Insights from Australian and New Zealand investment in Europe

“…Another reason for internationalising is to diversify a company's risks through diversification-seeking investments (Deng, 2004; Dunning, 2001). Diversification across unrelated products or geographically unconnected markets may reduce risk and affect performance of foreign subsidiaries (Jiao, Liu, Wu, & Xia, 2019). A company may therefore choose to enter other business fields to hedge risks (Cantwell, 2009; Yeung & Liu, 2008).…”

Top management team faultlines and corporate industrial diversification: The mediating role of strategic attentional breadth

“…Industrial diversification (also known as inter-industrial diversification), i.e., expansion into businesses new to the firm (Rumelt, 1982;Hitt et al, 1997), has been the main business form adopted by most firms in developed economies from the 1950s and 1960s until now (Mayer et al, 2017;Mendoza-Abarca and Gras, 2019). Most firms in emerging economies (Batsakis and Mohr, 2017;Gyan et al, 2017;Jiao et al, 2020) have also adopted this form in recent years. Determining whether or not to implement industrial diversification -and deciding on the extent of industrial diversification -are two of the most challenging and critical decisions faced by firm managers (Schommer et al, 2019;Guerras-Martin et al, 2020;Choi et al, 2021).…”

“…Panel fixed-effects regression of the relationship between relationship-related TMT faultlines and corporate industrial diversification Jiao et al, 2020). is now used to re-measure the corporate industrial diversification and strategic attentional breadth.…”

The impacts of diversification strategy on the financial performance of insurers

“…Accordingly, there are different definitions of diversification strategy in business and management literature. In the strategic management context, which is the central theme of this study, diversification refers to how firms deal with new markets, products, geographic areas or technologies (Lee 2021, Kanodia 2020, Naglic et al 2020, Jiao et al 2020. In addition, it includes goals, directions and means by which it can be accomplished (Van Kranenburg et al, 2004).…”

“…Strategic decision making process management disciplines, the concept of diversification can be highly attributed to Harry Markowitz's theory of portfolio selection (1952) which is advocated for risk-averse investors who expect more return for their investments. While in strategic management terminology, it refers to how firms deal with new markets, new products, new geographic areas or new technologies (Kanodia 2020, Naglic et al 2020, Jiao et al 2020, Lee 2021.…”