Beyond conventions: understanding the diversification-corporate performance relationship from contingency and portfolio perspectives

Abstract

This thesis comprises three logically connected studies that address inconclusive and controversial topics about diversification, including product and international diversification. The first study challenges the traditional view that diversification leads to risk reduction, by introducing a new measure of desynchronicity to capture the correlation between income streams in a corporate portfolio. The empirical results show that diversification does not necessarily lead to lower risk, but strategies that strengthen a firm’s level of desynchronicity could effectively reduce corporate risk. The second study advances a new view of risk-return trade-off and the Bowman paradox of firm diversification from an organisational portfolio perspective. Instead of investigating the two contradictory theories, trade-off theory and the Bowman paradox, separately, this study introduces a diversification-desynchronicity matrix to show that trade-off theory and the Bowman paradox apply to different quadrants of the matrix. A large-scale empirical analysis discovers that a diversification strategy that produces a high level of desynchronicity can lead to risk reduction without sacrificing return, supporting the Bowman paradox. The third study revisits the international diversification-performance relationship with a focus on the roles of countries of origin and destination. This study examines the relationship between international diversification and firm performance (i.e., risk and return), using the Uppsala model, organisational learning, portfolio theory and transaction cost theory. It differentiates international diversification into four types based on countries of origin and destination in developed and emerging markets: (i) firms from a developed country diversified into developed countries, (ii) firms from a developed country diversified into emerging countries, (iii) firms from an emerging country diversified into developed countries, and (iv) firms from an emerging country diversified into emerging countries. The relationship of each type of international diversification with firm performance is empirically tested and results show that the relationship varies in different modes. In summary, this thesis contributes to fields of both strategy and international business, by critically reviewing previous literature, developing new theoretical frameworks and presenting new empirical findings.