Impacts Of Business Diversification On Internationalization: A Study On Contractors

Globalization has created an international platform for interested contractors tofollow and exploit. Contractors operate in a complex and fragmented constructionindustry environment and the characteristics of this industry causes these firms topursue new opportunities in the international market. In the process ofinternationalization, diversification is a good development strategy applied bycontractors, since it is regarded as one strategy to diversify risks. However,diversification strategy is also thought of diversifying the contractors’ competitiveadvantages, so that the process of internationalization would be influenced. Whetherdiversification would improve the level of internationalization or not is a good questionto explore.On the basis of diversification theory, internationalization theory and relatedtheories and studies, the study selects Top225international contractors’ reports rankedby ENR (Engineering News-Record) from1994to2013. Distributions of theDiversification Indexes (DI) are explored first. The DI shows a downward trend withsubsequent changes in rankings.39contractors are selected for the following study,which exist in the reports ranked by ENR in a continuous period of15years and paneldata analysis is used. Diversified Index (DI), squared diversified index and the degree ofinternationalization (the proportion of international revenue in total revenue) areselected as variables. As a result, the data are fitted into Radom Effects RegressionModel, one panel data model, presenting the relationship between internationalizationand diversification approximate expression for a quadratic equation, and the graph foran inverted U-shaped parabolic shape.The result shows that diversification of international business would promote thedegree of internationalization of international contractors, but the influence wouldbecome increasingly smaller. When the degree of diversification achieve some point(0.359shown by the results), increasing of diversification would negatively influencethe proportion of international revenue in total revenue (the degree ofinternationalization). International contractors could be guided by this study. Whenconstruction firms decide whether to promote the internationalization strategy, theyshould weigh the advantages and challenges, the earnings and risks. If the constructionfirms has businesses in the international market already, they could consider to promote the degree of internationalization through diversification. However, they should judgethe degree of diversification based on the usage of resources, organization slack andcosts of transferring resources.Some inadequacies exist in this paper. First, the study does not consider the regionsof international revenue since revenue may be influenced by the economy of the regions.Second, unsuccessful cases of diversification are ignored when selecting samples. Thus,there exist bias, and the sample cannot reflect the overall situation of internationalcontractors. Third, the study just use entropy method to value the degree ofdiversification, ignoring the diversified development path (like mergers and acquisitions)and the diversification types (like related diversification and unrelated diversification).