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The relationship between international diversification and performance in service firms

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Abstract

International diversification is a growth strategy that has a major potential impact on firm performance. The relationship between international diversification and firm performance has been extensively studied in the international strategy literature. A major gap in the literature has been the non-existence of studies that have examined the effect of international diversification on performance in service firms. Previous studies that have tested the international diversification–performance relationship were based on samples of manufacturing firms. We argue that the form of the relationship between multinationality and performance is different in service firms. We provide a theoretical argument for this claim and hypothesize that there is a U-shaped curvilinear relationship between multinationality and performance in service firms. Our sample consists of 81 major German service firms, spanning across four industries. Results show that there is support for a U-shaped curvilinear relationship. Based on the findings, implications and directions for future research are provided.

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Notes

  1. One could further extrapolate that at very high levels of international diversification (that is, when service firms operate in many countries), particularly with a highly coordinated global strategy, the bureaucratic costs of excessive scale and scope would begin to outweigh their benefits in service firms as well as in manufacturing firms. If so, then the relationship between international diversification and performance in service firms might take a right-tipped S shape over time, or an inverse U-shaped curve followed by a downward shift. Although our study could not permit us to extrapolate beyond the 3-year data period, a longitudinal dataset over a long period could make such a study possible. We thank one anonymous reviewer for raising this issue.

  2. The distribution of international diversification was somewhat right-skewed. Given the nature of the data, we also suspect that it would be the case with almost all of the studies dealing with the multinationality variable. Unlike US-data-based studies, our study included those firms with less than 10% FSTS as well as those with at least 10% FSTS. In this sense, the right-skewedness of the distribution over international diversification in our sample is not as salient as that in earlier US-data-based studies.

  3. Multicollinearity would not be a problem as the tolerance and the variance inflation factors (VIF) in the regression analyses were well within the acceptable range (Belsley et al., 1980

  4. Lagged measures of international diversification were also used to examine the causality between international diversification and performance. We lagged the performance measure for both 1 year and 2 years, and the results did not change significantly. Coefficient estimates for the curvilinear effects in the 1-year and 2-year lagged ‘curvilinear’ models were 1.202 and 1.188, respectively, and both significant at the 0.01 level. Therefore we believe that the results presented in Table 2 adequately capture the causal effect of international diversification on performance.

  5. We thank one anonymous reviewer for pointing this out.

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Authors and Affiliations

  1. Department of Management, Florida State University, Tallahassee, USA

    N Capar

  2. Fox School of Business and Management, Institute of Global Management Studies, Temple University, Philadelphia, USA

    M Kotabe

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  1. N Capar
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  2. M Kotabe
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Correspondence to M Kotabe.

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Accepted by Tom Brewer, outgoing Editor, 21 January 2003.

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Capar, N., Kotabe, M. The relationship between international diversification and performance in service firms. J Int Bus Stud 34, 345–355 (2003). https://doi.org/10.1057/palgrave.jibs.8400036

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