Location Strategy, Geographical Diversification and Firm Performance

Location Strategy, Geographical Diversification and Firm Performance

INTRODUCTION In order to gain a better understanding of the impact of geographical diversification on the economic performance of firms , the scope of the firm in terms of its geographic or international activities , and the product diversification need to be taken into account. How decisions relating to a firm's geographic scope affect firm performance is the subject of a large body of research in the fields of strategic management and international business (see Hitt et al., 2006 for a recent review). Literature offers a variety of theories to explain motivation for expanding the geographic scope of a firm. Researchers state that firms gain benefits from international diversification by achieving economies of scale because they spread fixed costs of production, marketing, and research & development over a larger global market (Caves, 1971; Hymer, 1976; Kobrin, 1991), and they exploit and leverage firm-specific intangible assets into international markets (Bartlett and Ghoshal, 1989; Caves, 1971; Hymer, 1976). Researchers have also stated that firms can gain exploration benefits from geographic diversification (Buckley and Casson, 1976). International expansion can enhance a firm's knowledge base and capabilities through the experiential learning it gets from operating in foreign markets (Barkema 2001) Finally, some researchers have suggested that firms can diversify risks by operating across several international markets (Kim, Hwang, and Burgers 1993). The benefits from the exploitation of economies of scale and scope, organizational learning through exploration, and greater market power means that firms with greater international diversification should experience higher financial performance if their location strategy is effective. An important factor is the concept of cross-national distance , which includes a set of multi-dimensional measures , including economic , financial ,...