An analysis of the relationships between international diversification, product diversification, firm resources and firm performance

This study examined the interrelationships between firm resources, international diversification, product diversification and firm performance. These variables have long been of interest to researchers in strategic management and international management. Previous literature suggests that investments in innovation assets and marketing assets are directly related to a firm's level of international diversity and product diversity, and indirectly related to its performance. Yet, existing literature has largely ignored the causal linkages among these variables. Rather, existing models have usually taken a relatively simplistic approach by using single equation models that ignore complex interrelationships. Therefore, this study extended earlier work by presenting and testing a causal model drawn from the existing literature. In addition, the research model was tested across different time periods to compare the temporal stability of the findings. A sample consisting of U.S. manufacturing firms covering a period of 6 years between 1995–2000 was used. The results indicate that the benefits derived from international diversification are not necessarily due to exploiting proprietary firm resources. In fact, international diversification helps firms to invest more in these assets. In addition, the present study provided strong evidence that innovation assets leads to higher performance. Further, it was shown that such investments take some time to increase a firm's performance. There was also some support that firms with little or no product diversification are more likely to benefit from international diversification. Finally, results also indicate that product diversification leads to lower investments in innovation assets.