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Another Look at the Case for International Diversification

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Abstract

In an era of sluggish domestic growth, the business spotlight is once again turning to international diversification as a means to harness global growth opportunities and production efficiencies. However, the current empirical literature provides an inconsistent view of the effects of international diversification on business performance. We employ a panel-data analysis of the international revenues and assets of the 2011 Fortune Global 500 companies and examine their performance over the past 15 years. We find that the overall contribution of diversification to revenue growth, profitability and return on capital has been positive. However, the specific shape and timing of the impact can be complex. Accordingly, businesses need to be aware of the turning points for organizational gain as well as loss.

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Notes

  1. A quantile approach considers the entire distribution of the dependent variable, producing results that would otherwise be concealed under an OLS approach.

  2. Limitations of data coverage precluded a longer timeframe.

  3. Data source: Capital IQ.

  4. See, for example, Campello, Graham, and Harvey [2010] and Lane [2012] for evidence of this.

  5. We also conducted regressions using profit levels and return on assets. We found that using profit levels and profit margins yield similar regression results, as did the use of ROA and ROC. Results are available on request from the authors.

  6. We use logarithm to stabilize the variance in the series, and therefore prevent the issue of heteroskedasticity.

  7. We acknowledge that there could be a potential negative relationship between international diversification and stock volatility. However, our test suggests that the collinearities between our diversification measures and stock volatility are small.

  8. When the explanatory variables in a regression model are highly collinear, the model’s ability to allocate variations in the dependent variable to various explanatory factors can be impaired, resulting in inefficient parameter estimates.

  9. In 2011, 117 of the Fortune Global 500 (23 percent) companied are headquartered in emerging markets.

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Acknowledgements

The authors would like to thank two anonymous referees for their very helpful comments and suggestions on this article. We would also like to acknowledge the invaluable research assistance of our colleague Jade Siu.

Authors
  1. Mark J Purdy
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  2. Kuangyi Wei
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Additional information

*Mark J. Purdy is a managing director and chief economist at the Accenture Institute for High Performance. He leads Accenture’s research into a wide range of macroeconomic and geopolitical issues shaping the CEO agenda, and has published widely on topics such as globalization, international competitiveness, economic growth, and jobs. He is also one of the authors of Accenture’s Multi-polar World series of reports. Before joining Accenture, he was an economic advisor at the U.K. Competition Commission, the Consumers’ Association, and Ireland’s National Economic and Social Council. He has a B.A. (Hons) and a master’s degree in economics from Trinity College, Dublin. Kuangyi Wei is a research specialist at the Accenture Institute for High Performance. Her work has focused on the interplay between global economic and technology trends. She holds a B.Sc. Economics from the University of Birmingham and an M.Phil. in Economics from the University of Oxford.

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Purdy, M., Wei, K. Another Look at the Case for International Diversification. Bus Econ 49, 104–113 (2014). https://doi.org/10.1057/be.2014.16

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