The combined effects of product and geographical diversification on performance: Evidence in manufacturing SMEs

Abstract

This study explores both the individual impact of geographical diversification and its effect combined with product diversification on small and medium-sized enterprises’ (SMEs) performance. Unlike most prior studies, this study distinguishes between related and unrelated product diversification. The research setting is a sample of manufacturing SMEs (1994–2014). By using dynamic panel data models, the results provide statistical support for the existence of a horizontal S-shaped relationship between geographical diversification and performance. The findings also indicate that while related product diversification positively enhances the performance of those SMEs engaged in geographical diversification (albeit not indefinitely), unrelated product diversification may significantly impair it, especially for SMEs opting for low and high levels of international diversification. Our study reveals that product and international diversification strategies in the case of SMEs are complementary or substitutive strategies depending on the specific type of product diversification strategy and the level of geographical diversification adopted. JEL CLASSIFICATION: F23; L25; M16

Staying In or Stepping Out? Growth Strategies of Second Generation Immigrant Entrepreneurs

“…Our findings also contribute to the international business and international entrepreneurship literatures. IB studies explore the link between entrepreneurial motives, product and geographic diversification strategies (Benito-Osorio et al, 2020;Dikova et al, 2016). However, prior research is mainly in the context of outward internationalization of large multinational firms.…”

“…Outward internationalization is especially attractive to small firms (Hernández & Nieto, 2016). Small firms that overcome their resource limitations achieve high levels of geographic diversification (Benito-Osorio et al, 2020). Entry into many foreign markets also spreads costs and benefits from product diversification, especially in knowledge intensive industries (Li et al, 2012).…”

“…Finally, a large volume of IB literature is devoted to an investigation of the combined impact of product and geographic diversification on firm performance (Benito-Osorio et al, 2020). Extant research maintains that the impact of product diversification on performance is contingent on the degree of (outward) internationalization, and that product diversified firms perform better when they are geographically more diversified (Dikova et al, 2016).…”

“…They have a better understanding of the business environment and are more open to taking risks. Thus, they may be more strongly motivated to leverage their human and social capital in a broader range of product and geographic markets (Beckers & Blumberg, 2013;Benito-Osorio, Colino, Guerras-Martín, & Zúñiga-Vicente, 2020). They may target markets outside of their co-ethnic community, and even CoR, right from the beginning (McPherson, 2007;Rusinovic, 2008).…”

Corporate diversification and debt financing: Do family shareholders protect their control rights?

“…According to Shi et al (2021), diversified firms generally enjoyed substantial cash flows that provided cross‐divisional co‐insurance benefits by lowering the financial pressure and bankruptcy risks. This has promoted debt borrowing among firms in the diversified business group as the risk of debt can be reduced through diversification activities (Benito‐Osorio et al, 2020). Debt can also include tax shields for the highly profitable diversified firms.…”