Product Diversification and Market
Value of Large International Firms:
A Macroenvironmental Perspective
Tianjiao Qiu
ABSTRACT
Drawing on a strategic fit perspective in international marketing, this study explores how macroenvironmental
factors—cultural dimensions and globalization forces—affect the relationship between product diversification and market value of large international firms. The author hypothesizes that (1) the four dimensions of culture (individualism–
collectivism, uncertainty avoidance, power distance, and masculinity–femininity) significantly affect product diversification and (2) economic and social globalization positively moderate the relationship between product diversification and
market value of large international firms. The author empirically examines the hypothesized relationships using a sample of 485 firm-year observations from 17 countries for the period between 2006 and 2009. Using the hierarchical
linear modeling technique, the author demonstrates that firms in countries with cultures characterized by high uncertainty avoidance and low power distance have a higher degree of product diversification, and product diversification in
turn has a significant positive impact on firm market value. Furthermore, the author demonstrates that economic and
social globalization, as indicated by actual flows, personal contacts, and information flows, positively moderates the
relationship between product diversification and market value of large international firms.
Keywords: product diversification, cultural dimensions, globalization, market value, large international firms
roduct diversification—the extent to which a firm
manages market segments on the basis of its multiple and disparate products—has been one of the
most widely adopted foreign marketing strategies for
opening new markets and gaining market shares in a
turbulent and competitive global marketplace (e.g.,
Bowen and Wiersema 2005; Gabrielsson, Gabrielsson,
and Seppälä 2012; Griffith and Rubera 2014). Among
the three product strategy dimensions—product platforms, product lines, and individual products—strategic
marketing decisions of the length and breadth of product lines determine the extent of the firm’s product portfolio diversification and delineate the scope of market
P
Tianjiao Qiu is Associate Professor, Marketing Department, College
of Business Administration, California State University, Long Beach
(e-mail: Tianjiao.Qiu@csulb.edu). The author gratefully acknowledges the JIM review team for their comments and suggestions, which
were instrumental in improving the article. Bulent Menguc served as
associate editor of this article.
86 Journal of International Marketing
segments in which marketers compete (Gabrielsson et
al. 2006; Griffith and Rubera 2014). The advance of
globalization makes product diversification an even
more prominent international marketing strategic initiative for firms worldwide to expand into global markets
(Dos Santos, Errunza, and Miller 2008; Gabrielsson,
Gabrielsson, and Seppälä 2012).
Because of its strategic importance for the survival and
success of international firms, product diversification
has received increasing attention in international marketing (Gabrielsson, Gabrielsson, and Seppälä 2012;
Varadarajan 1986; Yli-Renko and Janakiraman 2008).
Recent research (e.g., Bowen and Wiersema 2005;
Gabrielsson et al. 2006; Gabrielsson, Gabrielsson, and
Seppälä 2012) has shown that external globalization
Journal of International Marketing
©2014, American Marketing Association
Vol. 22, No. 4, 2014, pp. 86–107
ISSN 1069-0031X (print) 1547-7215 (electronic)
pressure significantly affects the breadth of product
offerings. However, despite these findings, it is still
unknown how product diversification affects firm market value in a global marketplace with diverse cultural
values. This is an intriguing question for both marketing
practitioners and academics (Wiersema and Bowen
2008).
Recent international marketing literature adopting a
strategic fit perspective has argued that an appropriate
fit between marketing strategy and contextual factors
positively affects firm performance (e.g., Gabrielsson,
Gabrielsson, and Seppälä 2012; Hultman, Robson, and
Katsikeas 2009; Katsikeas, Samiee, and Theodosiou
2006). Contextual factors include both internal (i.e.,
controllable) factors related to firm capabilities and
external (i.e., uncontrollable) factors related to the
macroenvironment (e.g., Hultman, Robson, and Katsikeas 2009; Katsikeas, Samiee, and Theodosiou 2006).
Drawing on the strategic fit perspective in international
marketing, the current study brings two external contextual factors (cultural dimensions and globalization
forces) to the foreground and takes the initiative to
explore how these macroenvironmental factors affect
market success or failure of product diversification in
large international firms.
The study focuses on large international firms rather than
small globalizing firms for both theoretical and methodological reasons. Theoretically, focusing on large international firms provides a control on firm capacities—the
internal contextual factor, as highlighted in a strategic fit
perspective—while enabling the researcher to examine
the external contextual factors that shape the performance implications of product diversification. Large
international firms are equipped with the tremendous
tangible and intangible capabilities/resources necessary
for product diversification and can freely decide on their
strategic levels of product diversification. In addition,
product diversification has been a more prudent strategic choice for large international firms (Elsas, Hackethal, and Holzhäuser 2010) because they have strategic
needs for product diversification either as a general
policy of growth or as a defensive response to the
competitive pressures on their primary product categories caused by the advance of globalization (Varadarajan 1986). In contrast, under external globalization
pressure, resource-constrained small globalizing firms
need to focus on their core products (Gabrielsson,
Gabrielsson, and Seppälä 2012). Methodologically,
examining large international firms that are equipped
with necessary resources and have few restrictions
regarding diversification levels allows for heterogeneity
in product diversification and makes the statistical test
more robust (Elsas, Hackethal, and Holzhäuser 2010).
Drawing on a strategic fit perspective, the study
addresses three research questions: (1) How does each
cultural dimension—individualism–collectivism, uncertainty avoidance, power distance, and masculinity–
femininity—affect the product diversification of large
international firms? (2) How does product diversification affect the market value of large international firms?
(3) How does economic and social globalization moderate the effect of product diversification on firm market
value?
By addressing these questions, the study contributes to
international marketing literature from three perspectives. First, it sheds new light on how each cultural
dimension affects the product diversification of large
international firms. Although an extensive body of
research has demonstrated that cultural dimensions
have significant implications for various international
marketing strategies (e.g., foreign market entry [Bradley
and Gannon 2000], product diffusion [Dwyer, Mesak,
and Hsu 2005], services offshoring [Hahn and Bunyaratavej 2010]), little empirical research has examined
how cultural dimensions influence the scope of product
offerings in large international firms. The adoption of a
narrow or a broad scope in product offerings is a fundamental product strategic decision that marketers must
make (Gabrielsson et al. 2006), and it has significant
implications for firm competitiveness in the global marketplace (Wiersema and Bowen 2008). In this study, I
highlight the impact of cultural dimensions on this fundamental product strategy.
Second, this study contributes to international marketing literature by investigating how product diversification affects the market value of large international firms.
Previous studies of the link between product diversification and firm market value have centered on U.S. firms,
but only a few studies have explored firms with more
diverse international backgrounds (Gabrielsson,
Gabrielsson, and Seppälä 2012; Wan 2005). In addition,
research on the effect of product diversification on firm
market value across disciplines such as marketing,
strategic management, and finance has produced mixed
results (e.g., Gabrielsson, Gabrielsson, and Seppälä
2012; Graham, Lemmon, and Wolf 2002; Griffith and
Rubera 2014). One stream of research that focuses on
comparing the financial performance of diversified U.S.
firms with that of specialized U.S. firms has demon-
Product Diversification and Market Value of Large International Firms 87
strated that product diversification leads to value discount and that diversified firms have significantly lower
market value than single-segment firms (e.g., Berger and
Ofek 1995; Lang and Stulz 1994). In contrast, another
stream of research has suggested that diversification
contributes to firm survival and long-term performance
(e.g., Chiang 2010; Gassenheimer and Keep 1998). In
this study, instead of focusing on U.S. firms, I examine
large international firms with different national backgrounds and demonstrate that diversification into multiple product segments promotes the market success of
those firms.
and Seppälä 2012; Wan 2005) have shown that country environmental contexts play a critical role in
understanding the performance implications of product diversification.
Drawing on the strategic fit perspective, this study
examines how the alignment of two macroenvironmental factors—cultural dimensions and globalization
forces—and product diversification affects the market
value of large international firms. Figure 1 illustrates the
conceptual model.
Cultural Dimensions and Product Diversification
Third, globalization forces, including both economic
and social forces, are external contextual factors that
large international firms must face. However, although
recent studies (Bowen and Wiersema 2005; Gabrielsson,
Gabrielsson, and Seppälä 2012) have shown the significant impact of globalization on product diversification,
empirical evidence regarding the effect of the interaction
between the degree of globalization and product diversification on firm market value is scarce. Drawing on a
strategic fit perspective in international marketing literature, this study fills this gap by demonstrating that
researchers examining the performance implications of
product diversification must take into consideration the
economic and social globalization in which all firms are
embedded.
In the subsequent sections, I outline the constructs,
develop theoretical arguments, and present my hypotheses on the product diversification and market value of
large international firms. Then, I report the sampling
procedure, the empirical test, and the findings. Finally, I
discuss the implications of the results and potential
avenues for further research.
CONCEPTUAL FRAMEWORK
The strategic fit perspective, derived from the contingency theory in management studies, has assumed an
increasingly prominent position in international marketing literature (e.g., Gabrielsson, Gabrielsson, and
Seppälä 2012; Hultman, Katsikeas, and Robson 2011).
It emphasizes the degree of congruency between strategic choices and firm contexts and proposes that international marketing strategies—properly aligned with
external environmental opportunities and threats—will
promote firm performance. Consistent with this perspective, recent international marketing studies
(Gabrielsson et al. 2006; Gabrielsson, Gabrielsson,
88 Journal of International Marketing
“The business of international business is culture” (Hofstede 1994, p. 1). Culture refers to collective values,
beliefs, and ways of life that are socially created and
shared by a group of people (e.g., Dwyer, Mesak, and
Hsu 2005; Hofstede 1980). Although culture reflects
intangible and symbolic aspects of society, researchers in
the fields of business, social studies, psychology, and
education (Hofstede 1980, 1983; Schwartz 1994) have
long studied the behavioral implications of culture and
have used it to distinguish one group of people from
another.
Prominent studies on culture include Hofstede’s study of
cultural dimensions (e.g., Hofstede 1983), Schwartz’s
cultural value types (e.g., Schwartz 1994), the World
Wide Survey (e.g., Inglehart 1997), and the Global
Leadership and Organizational Behavior Effectiveness
project (House et al. 2004). Schwartz’s seven value types
focus on universal cultural values at an individual level.
The World Wide Survey provides a comprehensive
source of respondents’ beliefs, values, and attitudes as
well as their sociodemographic information and has
wide-ranging implications in social studies. The more
recent Global Leadership and Organizational Behavior
Effectiveness project develops nine cultural dimensions
to explain different preferences in leadership styles
(Tung and Verbeke 2010).
Among the aforementioned studies, Hofstede’s (1983)
study has been “the best known cross-cultural study”
(House et al. 2004, p. 239) and provides the best match
for the research purposes of the current study. Specifically, Hofstede’s study, based on IBM’s international
employee attitude survey, has the most influence in the
field of international business and is most relevant in
studying international marketing practices (Tung and
Verbeke 2010). Research on Hofstede’s cultural dimensions has demonstrated that macro-level cultural dimen-
Figure 1. The Model of Product Diversification on Firm Market Value
Economic Globalization
• Actual flows
• Restrictions
• Social Jlobalization
• Personal contacts
• Information flows
• Cultural proximity
Cultural Dimensions
• Individualism–collectivism
• Uncertainty avoidance
• Power distance
Product
Diversification
Market Value of Large
International Firms
• Masculinity–femininity
Notes: Control variables = company size, industry, and purchasing power parity (PPP) per capita.
sions significantly affect a wide variety of international
marketing strategies, such as cross-national product diffusion (Dwyer, Mesak, and Hsu 2005), international
brand management (Eisingerich and Rubera 2010), the
location of service offshoring projects (Hahn and Bunyaratavej 2010), and foreign market entry (Bradley and
Gannon 2000). In addition, I favor Hofstede’s macrolevel cultural framework because it provides clarity and
parsimony in conceptualizing macro-level cultural
dimensions.
According to Hofstede’s (1983) cultural framework, culture mainly consists of four dimensions: (1) individualism–
collectivism, which reflects how members of a society
perceive relationships with their immediate groups;
(2) power distance, which examines whether unequal
distribution of power is a social norm in the society;
(3) uncertainty avoidance, which pertains to the general
attitude toward uncertainty and ambiguity; and
(4) masculinity–femininity, which addresses how dominant values in a society reflect the traditional distribution of roles between genders.
In this study, I argue that the four cultural dimensions—representing shared value, perception, and
behavior—have important implications for the product
diversification strategy of large international firms.
Among the four dimensions, individualism–collectivism
has been prominent in explaining self-expression and
patterns of social behavior (e.g., Chelminski and Coulter 2007; Eisingerich and Rubera 2010; Hofstede
1983). Individualism and collectivism are opposite ends
of a one-dimensional construct; that is, they can be
viewed as existing on a continuum (Hofstede 1983).
Individualist cultures consist of loosely linked people
who place a strong emphasis on personal needs and
self-interest. The characteristic values of individualist
cultures are independence, autonomy, and competition.
In contrast, collectivist cultures are characterized by
closely linked people who are inclined to make their
personal goals subordinate to collective goals. Collectivists value conformity, cooperation, and harmony.
They are more likely to engage in behaviors that conform to social norms and contribute to group-interest
maximization.
Research has demonstrated that individualism–
collectivism strongly affects brand commitment (Eisingerich and Rubera 2010), chief marketing officers’ influence in the top management team (Engelen, Lackhoff,
and Schmidt 2013), and investment in operations
(Power, Schoenherr, and Samson 2010). People in indi-
Product Diversification and Market Value of Large International Firms 89
vidualist cultures prefer to interpret information and
perceive themselves to be independent of the social environment (Chelminski and Coulter 2007). Business relationships in individualist cultures are calculative and
more instrumentally oriented (Lund, Scheer, and
Kozlenkova 2013). In contrast, people in collectivist cultures prefer systematic knowledge and emphasize interdependence within the group. Business relationships in
collectivist cultures are more socially oriented and
emphasize relationship reciprocity. Firms in collectivist
cultures tend to invest more in structural resources than
those in individualist cultures (Power, Schoenherr, and
Samson 2010).
The cultural dimension of individualism–collectivism
has important implications for product diversification
because product diversification requires that firms
demonstrate strong independence and autonomy in
multiple product segments (Amit and Livnat 1988;
Berger and Ofek 1995). I argue that this strategic initiative is more feasible in individualistic cultures, where
firms are more assertive and value competition more. In
addition, I propose that individualism drives product
diversification because firms in individualist cultures are
more willing to take the risk of diversifying their product portfolio for future gains. In contrast, firms in collectivist cultures value collective goals and systematic
knowledge. They tend to promote the unity of the
organization while avoiding the competition and managerial conflict that product diversification may cause.
Therefore, I hypothesize the following:
H1: Individualism positively affects the degree of
product diversification in large international
firms.
Uncertainty avoidance focuses on how well people tolerate unpredictable environments and reflects how they
perceive opportunities and threats in future events (e.g.,
Möller and Eisend 2010). People in cultures with high
uncertainty avoidance are more sensitive to controllability in ambiguous and unknown situations (e.g., Hofstede
1980). Therefore, they strive to use reasonable measures
to develop structured situations. They also tend to exert
more control on strategic issues to reduce uncertainty in
the environment (Barr and Glynn 2004; Möller and
Eisend 2010). When encountering unstructured situations, they prefer to establish formalized rules and regulations to reduce risk and seek stability. In contrast,
people in cultures with low uncertainty avoidance are
less concerned about risks and are more inclined to
accept ambiguous and unpredictable situations.
90 Journal of International Marketing
Uncertainty avoidance has important implications for
business strategies. Research has demonstrated that
uncertainty avoidance significantly affects banner advertising effectiveness (Möller and Eisend 2010) and service
offshoring decisions (Hahn and Bunyaratavej 2010).
Three factors make it especially important to examine
the impact of uncertainty avoidance on product diversification. First, facing the complexity of the global marketplace, product diversification has been one of the
most important strategic initiatives for international
firms to cope with uncertain business environments and
reduce investment risks (e.g., Chiang 2010; Griffith and
Rubera 2014). Because people in cultures with high
uncertainty avoidance tend to adopt reasonable measures to reduce risks, I argue that they will value product
diversification more than those in cultures with low
uncertainty avoidance. Product diversification enables
people in high-uncertainty-avoidance cultures to avoid
situations requiring them to “put all their eggs in one
basket” and to exert more control in the uncertain
environment.
Second, product diversification is a promising strategic
initiative to provide gains when large international firms
are unsure of the future market. Ladbury and Hinsz
(2009) demonstrate that people in cultures with high
uncertainty avoidance have a greater tendency to choose
uncertain outcomes that lead to gains instead of losses.
Therefore, I argue that people in such cultures are more
likely to adopt product diversification to ensure future
gains than people in cultures with low uncertainty
avoidance.
Third, product diversification involves extensive formalized rules and regulations related to the firm’s areas of
business, resource allocation, and functional cooperation. The strategic initiative is more feasible in highuncertainty-avoidance cultures because people in such
cultures are rule oriented (Paul, Roy, and Mukhopadhyay 2006). The formalized rules and regulations provide the strategic controls that people in cultures with
high uncertainty avoidance need when dealing with the
uncertain global marketplace. Therefore, I hypothesize
the following:
H2: Uncertainty avoidance positively affects the
degree of product diversification in large international firms.
Power distance refers to the way people perceive the role
of authority in society and defines their level of comfort
with authoritarian control (e.g., Hofstede 1980, 1983;
Kemper, Engelen, and Brettel 2011). Cultures with low
power distance represent a more egalitarian social reality, in which power is more equally distributed among
social groups. People pay less attention to social status
and have less respect for authority. In contrast, in cultures with high power distance, the unequal levels of
power and hierarchy are deemed social norms, and position hierarchy is an inherent part of the social life. Subordinates always show deference to superiors and seldom voice disagreement with superiors’ decisions.
An extensive body of literature has demonstrated that
power distance significantly affects subordinate control
(e.g., Curtis, Conover, and Chui 2012; Kirkman, Lowe,
and Gibson 2006). The managerial practices in lowpower-distance cultures tend to be consultative styles,
whereas those in high-power-distance cultures typically
reflect authoritative styles. Recent research has also
demonstrated that power distance is a prime predictor
of firm marketing capabilities (Kemper, Engelen, and
Brettel 2011).
Because people in cultures with low power distance tend
to be consultative, I argue that firms in such cultures
have a better managerial environment for the execution
of product diversification strategy than those in cultures
with high power distance. Specifically, the adoption of a
product diversification strategy involves significant
resource remobilization and relocation (Ravichandran
et al. 2009). Such a significant strategic move requires
information sharing across the entire firm. Because
employees in low-power-distance cultures assume a
more engaged interaction with managers on important
strategic decisions, information related to the strategic
initiative is more readily accessible for all employees.
In addition, research has demonstrated that power distance dictates internal control structures and strategic
decision-making processes (Curtis, Conover, and Chui
2012). Firms in cultures with low power distance tend to
have decentralized organizational structures and decisionmaking processes, whereas firms in cultures with high
power distance typically have a centralized structure
and opt for centralized decision making (Hofstede
1983). The decentralized decision-making processes in
low-power-distance cultures ensure smooth information
sharing and facilitates the firm restructuring process
that product diversification requires. In contrast, cultures with high power distance restrict employees’ participative roles and limit their accessibility to strategic
business information, which slows down the product
diversification process. Therefore,
H3: Power distance negatively affects the degree of
product diversification in large international
firms.
The masculinity–femininity dimension addresses
whether the dominant values in a society are “masculine” (i.e., valuing assertiveness, aggressiveness, and
material success) or “feminine” (i.e., valuing cooperation, social support, and quality of life) (e.g., Hofstede
1980, 1983; Lund, Scheer, and Kozlenkova 2013). Masculinity and femininity are opposite ends of a onedimensional construct; that is, they can be viewed as
existing on a continuum (Hofstede 1983). The dimension has received considerable attention in research aiming to explain cross-cultural managerial behaviors and
organizational outcomes (e.g., importance of fairness in
interorganizational relationships [Lund, Scheer, and
Kozlenkova 2013], technology performance and utilization [Lippert and Volkmar 2007], marketing ethical
norms [Paul, Roy, and Mukhopadhyay 2006]).
The masculinity–femininity dimension has important
implications for product diversification strategies
because diversification into multiple product segments is
driven by firm growth ambition. In feminine cultures,
firms value relationship management, social support,
and interdependence among business functions, whereas
firms in masculine cultures place more emphasis on
independent decision making, ego-goal achievement,
and business size. Managers in feminine cultures value
social support and strive for business harmony. I argue
that such managers tend to adopt a more delicate
approach to diversification decisions because product
diversification inevitably creates competition and conflicts among the multiple business units within the firm.
Such an approach will hinder firm effort in diversifying
into multiple product segments. In contrast, managers in
masculine cultures are driven by the ambition of firm
growth and value aggressiveness and assertiveness. They
tend to adopt a more radical approach in executing
product diversification strategy, which promotes the
growth of multiple product segments. Formally,
H4: Masculinity positively affects the degree of
product diversification in large international
firms.
Product Diversification and Market Value
The impact of product diversification on firm performance has been a particularly fertile ground for research
for more than two decades (e.g., Lang and Stulz 1994;
Palich, Cardinal, and Miller 2000; Wiersema and
Product Diversification and Market Value of Large International Firms 91
Bowen 2008). A major stream of research focusing on
the diversification effort of U.S. firms has demonstrated
that excessive product diversification causes firm value
discount and hurts firm performance. For example,
Lang and Stulz (1994) find that firms operating in multiple market segments have a lower market value compared with single-segment firms. Berger and Ofek
(1995) suggest that overinvestment and management
inefficiency are the main causes of value loss when comparing aggregate values of stand-alone market segments
with the firm’s actual total value.
Despite these fruitful findings, researchers have agreed
that the samples used in this stream of research pose a
severe limitation to the implications of the results (e.g.,
Campa and Kedia 2002; Lang and Stulz 1994; Wan and
Hoskisson 2003). Evidence has shown that the firms in
these samples were poor performers before their diversification efforts (Campa and Kedia 2002). As Lang and
Stulz (1994) note, the negative relationship between
product diversification and firm market value may not
indicate that the diversification strategy itself is harmful
for the firm. A plausible reason for the negative relationship is that firms that perform poorly and fail in other
strategic efforts are more prone to seek growth opportunities through diversification. Using sample firms
involved in mergers and acquisitions, researchers (Graham, Lemmon, and Wolf 2002) have demonstrated that
it is not diversification that destroys value; rather, significant value reduction occurs when sample firms
acquire already-discounted business units. Dos Santos,
Errunza, and Miller (2008) show similar results in
examining cross-border mergers and acquisitions. They
suggest that international diversification through acquisitions of “fairly valued” foreign business units adds
value to the firm instead of destroying value.
To address the sampling issues highlighted in prior
research, the present study focuses on large international
firms and examines how product diversification affects
those financially established firms in the global marketplace. Recent research (Elsas, Hackethal, and Holzhäuser
2010) has demonstrated that diversification of large
international banks significantly increases bank profitability and market valuations. Extending the research
on large international banks, I argue that large international firms can benefit from product diversification
for three main reasons. First, product diversification
increases firm market coverage (Amit and Livnat 1988;
Chiang 2010). Economic and social globalization has
created an increasingly competitive global marketplace.
International firms must compete not only with their
92 Journal of International Marketing
domestic competitors but also with their international
peers. Product diversification enables firms with extra
resources to have greater market coverage and to leverage the brand equity of their established products to gain
access to consumers of other product categories. For
example, the Walt Disney Company successfully grew
from a company that covered only the media network
segment to an international company that engages in
multiple product segments, including parks and resorts,
studio entertainment, and consumer products.
Second, product diversification makes it possible for
firms to experience increasing economies of scale
through the synergy developed across product units
(Gassenheimer and Keep 1998). Researchers (Chiang
2010; Delios and Beamish 1999) have demonstrated
that managing multiple product units allows for the
joint development and utilization of firm competencies,
which leads to intrafirm innovation efficiency and lowers research and development spending. Recent research
in marketing has also shown that product diversification
is related to greater new product output, which contributes to firm competitiveness (Yli-Renko and Janakiraman 2008).
Third, product diversification reduces firm risks in the
face of market uncertainty (Elsas, Hackethal, and
Holzhäuser 2010). The advance of globalization has
triggered tremendous changes in social and economic
conditions and has created global market uncertainty.
Product diversification is an effective strategic response
to market uncertainty (Miller 1992). Although such a
strategy may not be successful for all firms, large established firms have better chances to survive and reap the
profits. Therefore,
H5: Product diversification positively affects the
market value of large international firms.
The Moderating Role of Globalization
Research has demonstrated that there are a variety of
contingency conditions, such as type of diversification
(Markides and Williamson 1994), corporate government structure (Lins and Servaes 1999), and information technology spending (Ravichandran et al. 2009),
under which firms may derive positive or negative value
from product diversification. For example, researchers
have shown that firms diversifying into core-businessrelated activities gain value through product diversification, whereas firms diversifying into unrelated activities
lose value (Markides and Williamson 1994). Lins and
Servaes (1999) demonstrate that product diversification
destroys value in Japan and the United Kingdom but not
in Germany. They suggest that corporate governance
structures due to international differences have caused
the different results across the three countries.
Despite these findings, prior research has mainly
focused on corporate-level contingency conditions on
the performance implications of product diversification,
whereas macroenvironmental conditions such as globalization have been largely overlooked. Globalization,
defined as “an increase in the extent to which individuals and institutions transact or exchange with others
based in nation states other than their own, or otherwise
influence them through their economic and social
behavior” (Bourguignon et al. 2002, p. 1), plays an
increasingly important role in driving firm strategic
activities and shaping firm competitive positions in the
global marketplace (Cadogan, Kuivalainen, and Sundqvist
2009; Palich and Gomez-Mejia 1999; Wiersema and
Bowen 2008).
Recent research in economics and sociology (e.g.,
Arribas, Pérez, and Tortosa-Ausina 2009; Dreher and
Gaston 2008; Olzak 2011) has demonstrated that globalization has two salient dimensions: economic and
social. Economic globalization reflects the extent to
which globalization has affected a country’s economic
activities, and it focuses on cross-border market
exchanges of goods, capital, and services (Dreher 2006).
Dreher (2006) suggests that economic globalization
contains two subindices: actual flows and restrictions.
These subindices capture economic globalization from
both the positive and negative perspectives. Actual
flows, the positive index of economic globalization,
include data on a country’s international business activities, such as trade, foreign direct investment, and portfolio investment. The negative index of economic globalization, restrictions, summarizes the revenues that a
country generates through its tariff and nontariff barriers on international business activities. The rationale is
that the higher the revenues generated through tariff and
nontariff barriers, the less favorable the national environment for economic globalization.
Economic globalization reflects the extent to which a
country is involved in global integration of products,
services, and capital markets. Bowen’s (2005) empirical
study on U.S. firms from 1985 to 1994 demonstrates
that foreign-based competition drives U.S. firms to
reduce their level of product diversification and that this
effect is stronger when a firm has a lower level of performance. Gabrielsson, Gabrielsson, and Seppälä
(2012) find that external globalization pressure has a
negative effect on the breadth of product offerings for
firms in small and open economies under strict resource
constraints. The findings demonstrate that globalization
has a negative impact on product diversification when
firms struggle with limited resources and low financial
performance. I suggest that the negative relationship
between globalization and product diversification
reported in prior studies may not indicate that globalization itself reduces the diversification of product portfolio. Instead, the negative relationships may be mainly
due to resource constraints and the firm’s poor performance, which hinder the firm product diversification
strategy and limit the firm’s possibilities for taking
advantage of globalization’s benefits.
Using large international firms as the primary focus of
the study, I argue that the greater global integration of
products, services, and capital markets provides performance benefits to large international firms for three reasons. First, economic globalization reduces operating
costs of product-diversified firms. Product-diversified
firms in a highly integrated economic market have
greater bargaining power when sourcing their inputs
and distributing their diversified products (Chang and
Wang 2007). Second, a highly integrated economic market with reduced tariff and nontariff barriers facilitates
the consolidation of business activities such as research
and development, manufacturing, and distribution
across product units and enhances firm efficiency in
resource allocation (Amit and Livnat 1988; Palich and
Gomez-Mejia 1999). Third, economic globalization
lowers capital investment requirements for productdiversified firms (Hemerling, Young, and Bradtke
2005). The highly integrated capital market enables
product-diversified firms to set up an efficient internal
capital market to coordinate cash flows across product
divisions (Ravichandran et al. 2009). The combination
of lower operating costs, more efficient resource allocation, and lower capital investment requirements leads to
better market value of product-diversified firms. Therefore, I propose the following:
H6: Economic globalization, as indicated by
(a) actual flows and (b) restrictions, positively
moderates the relationship between product
diversification and market value of large international firms.
Social globalization captures cross-border social interactions of ideas, information, and cultures (Dreher
2006). Dreher (2006) classifies social globalization into
Product Diversification and Market Value of Large International Firms 93
three subcategories: personal contacts, information
flows, and cultural proximity. The index of personal
contacts captures direct interactions with people from
other countries. The index of information flows captures the global spread of news and ideas through various media, such as the Internet, television, and newspapers. The index of cultural proximity focuses on the
cross-border flow of beliefs and values, as measured by
the spread of cultural products such as books and songs.
I argue that social globalization benefits productdiversified firms from two perspectives: the market and
the capability perspectives. From the market perspective,
social globalization leads to the convergence of cultures
on a global scale and facilitates the homogenization of
consumer tastes, desires, and demands, which enables
product-diversified firms to efficiently conduct marketing promotion for a wide array of product units (Levitt
1983; Palich and Gomez-Mejia 1999). From the capability perspective, social globalization leads to the convergence of ideas and human talents from various countries and enhances cross-cultural communication, which
creates an efficient platform for product innovation
(Palich and Gomez-Mejia 1999). For example, many
leading international product-diversified firms, such as
General Electric, Microsoft, and DuPont, have created
product development teams with researchers of diversified social and cultural backgrounds. Those firms can
make use of this capability advantage to enhance their
product diversification strategies and generate more
diversified products to meet global consumer demand,
thereby enhancing firm market value. Formally,
H7: Social globalization, as indicated by (a) personal contacts, (b) information flows, and
(c) cultural proximity, positively moderates the
relationship between product diversification
and market value of large international firms.
METHOD
Sample
The sample includes large international firms listed in
Fortune’s global most-admired (FGMA) firms from
2006 to 2009. To build the data set, I collected secondary data from multiple archival sources: FGMA firm
lists, Compustat’s industry segment database, Compustat’s annual financial database, Hofstede’s national
index scores on cultural dimensions, the KOF (Swiss
Economic Research Institute) index of globalization,
and International Monetary Fund eLibrary Data. First,
94 Journal of International Marketing
I compiled a list of FGMA firms from Fortune publications between 2007 and 2010. On the FGMA firm lists
from this period, there are 353 firms for 2006, 352
firms for 2007, 182 firms for 2008, and 362 firms for
2009. The number of listed firms was not stable over the
years due to different economic situations. Combined,
the four-year FGMA firm list contains 575 large international firms, representing 29 countries. As a result of
the 2008 financial crisis, only approximately 150 firms
appeared in the FGMA firm list for all four years. For
example, Circuit City, a U.S.-based firm on the FGMA
list for 2006 and 2007, dropped off the list and went out
of business in 2009.
Second, I checked the firms’ ticker symbols. On the
FGMA firm lists, I identified 171 firms with ticker symbols the 2006 list, 243 firms with ticker symbols on the
2007 list, 122 firms with ticker symbols on the 2008
list, and 312 firms with ticker symbols on the 2009 list.
I then collected annual product segment data of FGMA
firms with ticker symbols from the Compustat industry
segment database. The segment data contain information on net sales of firms by product segments as well as
the number of reported segments. Third, I collected
financial data of FGMA firms with firm ticker symbols
from the Compustat annual financial database. Fourth,
I collected macroenvironmental data from multiple
databases. Specifically, I collected the economic and
social globalization index from the KOF index of globalization and gathered nations’ cultural dimension data
from Hofstede’s cultural database. Finally, I merged the
data from the aforementioned sources.
I omitted the firms with too many missing segments or
financial data. The final sample consists of the firms
that appear in the Compustat industry segment database
for which data on all model variables were available.
Specifically, the final sample contains 485 firm-year
observations across 57 industries in 17 countries during
2006–2009. Following the FGMA database, I identified
the headquarter country of large international firms as
the firm home country, where the firm’s corporate-level
strategic decisions are made (Goold, Campbell, and
Alexander 1994). The final sample covers 250 FGMA
firms, with 121 firm-year observations in 2006, 110
firm-year observations in 2007, 74 firm-year observations in 2008, and 180 firm-year observations in 2009.
Among 485 firm-year observations, 378 are for firms in
North America, 73 are for firms in Europe, 30 are for
firms in Asia; and 4 are for firms in Oceania. The firms
in the final sample have an average of 92,256 employees, with an average operating revenue of approximately
$30 billion. On average, the firms operate in four product segments and generate approximately 41% of their
sales revenue outside their home country.
Measures
I used Tobin’s q as a measure of market value of large
international firms. Tobin’s q has been widely used as a
market value measure across various business disciplines, such as marketing, finance, and international
business (e.g., Luo and Bhattacharya 2006). Following
previous literature, I derived the measure of the market
value and the book value of the firm using Compustat’s
annual financial database. I then calculated Tobin’s q as
the market value of a firm divided by the book value of
total assets for each firm-year observation.
I used Ravichandran et al.’s (2009) Herfindahl measure
of diversification to capture the extent of diversity in a
firm’s product segments. I computed the Herfindahl
index with Compustat industry segment data on net
sales by product segments as well as by the number of
reported segments. The complementary data of the
Herfindahl index capture the degree of diversification
on the basis of how sales volumes in multiple product
segments are distributed. Specifically,
Product diversification index = 1 – normalized
N
Herfindahl index = 1 –
!S ,
2
i
i =1
where Si is the proportion of sales volume generated
from product segment i and N is the number of product
segments. Product diversification index ranges in value
from 0 to 1, and higher values indicate greater product
diversification.
I collected the data on the degree of economic and social
globalization from the KOF index of globalization.
According to Dreher (2006), the degree of economic
globalization can be measured with two indices: actual
flows and restrictions. The index of actual flows reflects
international business activities, including trade, foreign
direct investment, and portfolio investment, whereas the
index of restrictions measures tariff rates, hidden import
barriers, and capital controls. The degree of social globalization can be measured with three indices: personal
contacts, information flows, and cultural proximity. The
index of personal contacts is based on a combination of
social statistics, including international telecom traffic,
the degree of tourism, government and workers’ transfers received and paid, and the number of international
letters sent and received. The index of information flows
captures the usage rate of various media, such as telephone, Internet, cable television, newspapers, and
radios, for information. The index of cultural proximity
uses the number of McDonald’s restaurants in a country
as proxy. The indices range on a scale from 1 to 100. I
used the logarithmic value of those indices to capture a
country’s degree of economic and social globalization.
The logarithmic transformation of the variable helps
avoid skewed distributions and improve interpretability
of the results.
I collected data on a nation’s cultural dimensions from
the Hofstede cultural database. The cultural dimension
scores range from 1 for the lowest to 120 for the highest. I used the logarithmic value of those scores to represent a country’s culture dimensions.
I also included stringent firm- and country-level control
variables in the model testing. At the firm level, I controlled the influence of firm size in predicting Tobin’s q.
Following the commonly used method (Luo and Bhattacharya 2006), I measured firm size using the logarithmic value of the number of employees (in thousands). I
also collected firm industry data through Fortune magazine and used the data to control firm industry. At the
country level, I controlled the purchasing power of a
nation’s consumers using the logarithmic value of purchasing power parity (PPP) per capita. Purchasing power
parity per capita is equal to gross domestic product per
capita after adjusting the purchasing power parity of each
country. I collected PPP data through the IMF eLibrary.
Analysis and Results
I empirically tested the multilevel model with hierarchical linear modeling technique (Snijders and Bosker
1999), which allows for the testing of diversification
strategies within and between the firm and the country
levels. Specifically, the model involved two levels, with
Level 1 corresponding to the firm level and Level 2 corresponding to the country level. Table 1 contains the
descriptive statistics and correlations of both Level 1
and Level 2 variables.
Before testing the model, I conducted the assessment of
a significant between-group variance in market value
with a null model. The null model is an intercept-only
model in which no predictors are specified. I calculated
the between-country variance (t2) in market value to be
.28, and the variance between firms in the same country
(d2) to be .46. Therefore, the interclass correlation coef-
Product Diversification and Market Value of Large International Firms 95
96 Journal of International Marketing
1.93
Cultural proximity
*p < .05.
**p < .01.
1.92
Information flows
.02
1.92
1.83
Restrictions
1.79
Actual flows
Personal contacts
.16
1.78
Masculinity
.11
.05
.02
.06
.11
.07
1.69
1.61
Uncertainty avoidance
.10
Power distance
1.92
Individualism
.05
.80
1.53
4.63
.29
.56
SD
.43
1.70
PPP
Level 2 Variables
Market value
Product diversification
Firm size
Level 1 Variables
M
–.09*
.00
–.07
–.02
.11*
.00
.16**
.16**
–.20**
–.14**
.04
.11*
1
.02
.03
.06
–.02
.11*
–.03
–.09
.12**
.06
–.02
.07
2
.06
.00
–.05
.01
–.01
.02
–.03
–.06
.02
–.04
3
.32**
–.30**
.07
.21**
.12*
.07
–.42**
–.60**
.59**
4
.57**
.09
.42**
.44**
.05
–.05
–.62**
–.20**
5
.10*
.41**
6
–.16**
–.09*
–.24**
–.37**
–.05
Table 1. Descriptive Statistics and Correlations Among Level 1 and Level 2 Study Variables
–.28**
–.23**
–.39**
–.14**
–.05
.01
7
–.18**
–.37**
–.38**
–.33**
–.27**
8
.11*
.26**
.31**
.13**
9
.10*
.33**
.49**
10
.43**
.86**
11
.27**
12
ficient (t2 / [t2 + d2]) is .38, indicating that 38% of variance in market value resides between countries. The
results indicate that Level 2 indeed has an important
impact on market value and justifies the use of hierarchical linear modeling technique.
I set up nine linear mixed equations to test the effect of
product diversification on market value. Both Models 1
and 2 have product diversification as the dependent
variable. Specifically, I use Model 1 to examine the
effect of control variables: firm size, firm industry, and
a nation’s PPP on product diversification. I use Model 2
to test the effect of cultural dimensions on product
diversification. Models 3–5e use market value as the
dependent variable. Model 3 tests the effect of product
diversification on market value.
The correlation statistics show that personal contacts
and information flows, the two independent variables
from the KOF index of globalization database, are
strongly correlated. Further variance inflation factor
collinearity statistics confirmed that there might be a
multicollinearity issue between the two variables. To
avoid multicollinearity issues in interpreting the test
results, I separated these two variables in the testing of
the following models. Specifically, Model 4 includes
only actual flow, restrictions, personal contacts, and cultural proximity in the test of the effect of product diversification on market value. Models 5a–5e are used to
examine the moderating effect of each of the five globalization indices on the relationship between product
diversification and market value.
Table 2 contains the list of the models with a summary of
the parameter estimate g’s and the global fit statistics (–2
log-likelihood and Akaike information criterion [AIC]).
The findings from Model 2 demonstrate that uncertainty avoidance significantly affects product diversification (g = .45, p < .01). The findings show that firms in
cultures with high uncertainty avoidance tend to have a
higher level of product diversification than those in cultures with low uncertainty avoidance, in support of H2.
The findings also demonstrate that power distance has a
significant negative relationship with product diversification (g = –.59, p < .05). They show that firms in lowpower-distance cultures have a higher degree of product
diversification than those in high-power-distance cultures, which supports H3.
Notably, the findings show that the other two cultural
dimensions, individualism–collectivism and masculinity–
femininity, have no significant relationship with product
diversification. Therefore, H1 and H4 are not supported.
I predicted that product diversification positively affects
the market value of large international firms. The findings from Model 3 confirm the significant positive relationship (g = .33, p < .05) and show that product diversification contributes to market success of large
international firms, in support of H5.
I use Models 5a–5e to examine the moderating effects
of actual flows, restrictions, personal contacts, information flows, and cultural proximity on the relationship between product diversification and firm market
value. The parameter estimates for the interaction
terms are highly significant for actual flows (g = 4.50,
p < .01), personal contacts (g = 10.70, p < .01), and
information flows (g = 26.51, p < .01) but are not significant for restrictions and cultural proximity. Model
5a (AIC = 940.3), Model 5c (AIC = 927.5), and Model
5d (AIC = 941.7), which include the interaction terms
between product diversification and actual flows, personal contacts, and information flows, demonstrate
better global fit statistics than Model 4 (AIC = 956.9),
in which no interaction is included. The three significant moderators exhibit a similar interaction pattern.
In the condition of high actual flows, personal contacts,
and information flows, product diversification significantly improves firm market value, whereas the relationship is reversed in the condition of low actual
flows, personal contacts, and information flows. The
findings support H6a, H7a, and H7b. Figure 2 plots the
significant interactions between product diversification
and actual flows.
To determine whether the findings are biased in favor of
the firms that stay on FGMA lists between 2006 and
2009, I collected further data on the firms that dropped
out of FGMA lists between 2006 and 2009. The supplementary data set contains 214 firm-year observations. I
merged the supplementary data with the current data
and generated a new data set. Then, I followed the testing procedure on the current data set and conducted the
model testing on the new data set. The empirical findings from the new data set are consistent with the current findings.
I further conducted an endogeneity test to check for a
possible simultaneous causality bias in the model. Following the common procedure in econometrics, I
adopted lagged product diversification as the instrumental variable for current product diversification. I
Product Diversification and Market Value of Large International Firms 97
98 Journal of International Marketing
Step 1
Firm size
.03 (.03)
PPP
–.04 (.23)
Product
diversification
(PD)
Step 2
Individualism
Uncertainty
avoidance
Power distance
Masculinity
Step 3
Actual flows (AF)
Restrictions (RS)
Personal
contacts
(PC)
Cultural
proximity
(CP)
Information
flows (IF)
Model 1
–.43 (.49)
–.08 (.8)
.32 (.32)
.45 (.14)**
–.59 (.24)*
.03 (.09)
.11 (.08)
–5.60 (1.42)**
Model 5b
–1.00 (.66)
–.10 (.98)
.46 (.37)
–.09 (.28)
1.60 (3.50)
–4.79 (.90)**
2.18 (.96)*
.41 (.23)
–1.64 (3.36)
–3.61 (.83)**
2.04 (.97)*
1.27 (1.02)
2.14 (.97)*
–2.85 (.94)**
.38 (.23)
–5.86 (4.17)
–.1.19 (.66)
–.45 (1.00)
.24 (.38)
1.23 (1.05)
–7.77 (2.55)** –24.74 (14.76)
.10 (.08)
–5.02 (1.43)
Model 5a
–1.42 (.65)
–.18 (.99)
–.03 (.34)
1.72 (1.01)
.33 (.16)*
.38 (.16)*
.55 (.59)
.11 (.08)
–5.96 (1.41)**
Model 4
Fixed Effects g
.06 (.09)
–2.77 (1.16)*
Model 3
.22 (.17)
.05 (.03)
–.06 (.34)
Model 2
Table 2. Results of Hierarchical Linear Modeling Test
.10 (.08)
–6.56 (1.57)**
Model 5d
.10 (.08)
–6.03 (1.41)**
Model 5e
1.95 (.94)*
–6.75 (1.03)**
.15 (.23)
5.33 (3.54)
–.57 (.66)
–.61 (.96)
.64 (.36)
.84 (1.00)
–16.41 (3.54)**
1.43 (.96)
.07 (.24)
–1.15 (3.38)
–1.10 (.65)
.33 (.97)
.30 (.35)
1.79 (.99)
.69 (1.56)
–3.76 (.84)**
.39 (.23)
–1.02 (3.40)
–.91 (.67)
–.16 (.10)
.00 (.34)
1.80 (1.01)
–19.26 (4.12)** –50.50 (12.64)** –6.05 (5.77)
.10 (.08)
–5.15 (1.38)**
Model 5c
Product Diversification and Market Value of Large International Firms 99
–5.0
–3.0
Model 2
–28.4
–26.4
*p < .05.
**p < .01.
Notes: Standard errors are in parentheses.
Step 4
PD ¥ AF
PD ¥ RS
PD ¥ PC
PD ¥ IF
PD ¥ CP
Fit Statistics
–2 loglikelihood
AIC
Model 1
Table 2. Continued
986.3
990.3
Model 3
952.9
956.9
Model 4
940.3
944.3
4.50 (1.41)**
Model 5a
Fixed Effects g
944.1
948.1
13.05 (7.68)
Model 5b
927.5
931.5
10.70 (2.25)**
Model 5c
941.7
945.7
26.51 (6.60)**
Model 5d
947.6
951.6
3.30 (2.98)
Model 5e
Figure 2. Actual Flows as Moderator of the Relationship Between Product Diversification and Firm Market Value
1.4
1.2
Market Value
1
0.8
0.6
0.4
High flows
Medium flows
0.2
Low flows
0
then conducted instrumental variable regression with
two-stage least squares to examine whether the implicit
causality assumption of my analysis affects estimation
results. The estimation coefficients from instrumental
variable regression show significant results similar to
my current findings. Therefore, simultaneous causality
bias does not pose a serious threat to the results of the
study.
market value of large international firms. The findings
demonstrate that uncertainty avoidance and power distance significantly affect product diversification and
that product diversification leads to better market value
of large international firms. The positive relationship
between product diversification and firm market value
is further moderated by economic globalization, as indicated by actual flows, and by social globalization, as
indicated by personal contacts and information flows.
DISCUSSION
Theoretical Contributions
Product diversification is one of the most important
product strategic decisions in marketing management
(Gabrielsson et al. 2006). Despite the recent effort in
international marketing research to understand the
antecedents and consequences of product diversification
and the increasing attention toward the advance of globalization (e.g., Gabrielsson, Gabrielsson, and Seppälä
2012; Wiersema and Bowen 2008), the question of how
cultural dimensions and globalization forces affect the
success or failure of product diversification is still
largely overlooked in the literature. The current article
fills the research gap by presenting an empirical study
on how cultural dimensions affect product diversification and how product diversification in turn affects the
The study makes three important theoretical contributions to international marketing literature on product
diversification. First, drawing on Hofstede’s (1980) cultural framework, the study presents empirical evidence
that shows the direct impacts of uncertainty avoidance
and power distance on the product diversification of
large international firms. The findings underscore the
critical role of national culture in firm strategic decisions
of diversifying into multiple product segments. More
specifically, firms in cultures with high uncertainty
avoidance demonstrate a higher degree of product diversification than those in cultures with low uncertainty
avoidance. The findings are consistent with previous
research on uncertainty avoidance (Barr and Glynn
100 Journal of International Marketing
2004) and show that product diversification strongly
reflects how firms perceive future opportunities and
threats. As Barr and Glynn (2004, p. 61) suggest, uncertainty avoidance is “the most directly related to the
attribute of controllability that is critical in discerning
threat and opportunity.” The strategic decision of diversifying into multiple market segments represents a firm’s
effort to control future uncertainty by seeking potential
gains, and such effort is supported in cultures with high
uncertainty avoidance.
Power distance is another cultural dimension that shows
a significant impact on product diversification. Firms in
cultures with low power distance demonstrate a higher
degree of product diversification than those in cultures
with high power distance. The findings highlight the
importance of consultative management styles in fostering product diversification and show that the decentralized internal control structure is conducive for the
strategic initiative. For large international firms, the
organizational structures are composed of various
domestic and international units. In cultures with high
power distance, the complex structures pose significant
challenges for information communication, which could
hamper firm product diversification efforts. In contrast,
cultures with low power distance, which allow for
smooth information sharing among various domestic
and international units, provide a strategic fit for the
conduction of product diversification.
It is also notable that two cultural dimensions,
individualism–collectivism and masculinity–femininity,
have no relationship with product diversification. One
conjecture for the insignificant findings is that the two
cultural dimensions have conflicting effects on product
diversification. Specifically, on the one hand, firms in
individualist cultures tend to encourage individual initiatives and be more innovative than those in collectivist
cultures (e.g., Jones and Davis 2000). The innovativeness
of firms in individualist cultures promotes product diversification. On the other hand, firms in individualist cultures face strong obstacles in product diversification
because it is difficult for them to reach consensus on how
to remobilize resources and restructure firm product segments (Lund, Scheer, and Kozlenkova 2013). A similar
explanation may apply to the insignificant relationship
between the masculinity–femininity cultural dimension
and product diversification. Firms in masculine cultures
are driven by aggressiveness and assertiveness and tend
to prefer product diversification as a strategy initiative to
push firm growth (Lippert and Volkmar 2007). However, those firms may fail to adopt a product diversifica-
tion strategy because masculine cultures do not value
relationship management and the intersegment support
that product diversification requires.
Second, the study addresses a fundamental question
regarding how product diversification affects the market
value of large international firms and indicates, as predicted, that it positively affects their market value. The
empirical results suggest that large international firms
benefit from product diversification and can rely on it to
reduce operational costs and create synergistic economies,
thereby boosting firm market value. The results also
suggest that value discount arguments on product diversification found in prior studies may be largely conditioned by the narrow sampling of U.S.-based firms that
performed poorly before their diversification effort
(Campa and Kedia 2002; Wan and Hoskisson 2003).
This finding is consistent with the recent study on large
international banks (Elsas, Hackethal, and Holzhäuser
2010), and it highlights the critical role of product diversification for the success of large, mature firms facing
intense global competition.
Third, the empirical findings indicate that a country’s
degree of economic and social globalization positively
moderates the relationship between product diversification and market value of large international firms. In
contrast to prior studies (e.g., Bowen and Wiersema
2005; Gabrielsson, Gabrielsson, and Seppälä 2012), my
sample covers large international firms listed as FGMA
firms, which made it possible to study firms that can
freely decide on their strategic choices regarding their
degree of product diversification. Therefore, this study
complements prior studies that either consider only U.S.
firms (Bowen and Wiersema 2005) or cover firms in
small and open economies (Gabrielsson, Gabrielsson,
and Seppälä 2012).
The study provides empirical evidence regarding the
effect of the fit between globalization and firm strategic
choice of product diversification on firm market value.
Globalization, one of the most important macro-level
environmental forces, has long been ignored in the study
of product diversification. However, the advance of
globalization makes product diversification a necessary
strategic initiative for large international firms to compete in a broad array of product categories (Wiersema
and Bowen 2008). Taking note of the fundamental
changes in the competitive conditions with the globalization of markets and industries, Wiersema and Bowen
(2008) stress the need for more studies on product diversification in the context of globalization. The current
Product Diversification and Market Value of Large International Firms 101
study provides insightful and noteworthy results to fill
the research gap. Although I find no significant moderating effect of restrictions and cultural proximity, three
of the globalization indices—actual flows, personal contacts, and information flows—demonstrate similar
moderating effects on the relationship between product
diversification and firm market value.
The results show that the higher the levels of a country’s
actual flows, personal contacts, and information flows,
the stronger the relationship between product diversification and firm market value. With regard to economic
globalization, as indicated by actual flows, the results
indicate that a country’s openness in economic activities,
including trade, foreign direct investment, and portfolio
investment, provides a strategic fit for product diversification that enhances firm market value. Firms operating
in an economically globalized country have greater
potential to benefit from product diversification.
With regard to social globalization, as indicated by personal contacts and information flows, strong empirical
evidence shows that highly product-diversified firms
reap more performance returns from a country’s
increased social interactions with other countries
through channels such as tourism, social media, and
international telecommunications. Social globalization
leads to the homogenization of consumer demand and
the convergence of ideas and talents. However, the
homogenization of consumer demand does not mean
that consumers demand fewer varieties of products.
Rather, social globalization makes consumer demand
more technology and Internet driven, which creates
strong incentives for new product development and provides unique marketing opportunities for highly product-diversified firms to generate market value.
It is also important to note that the relationship between
product diversification and firm market value is
reversed in the case of lower levels of actual flows, personal contacts, and information flows. The findings
again highlight the benefits of globalization on product
diversification and indicate that product diversification
harms the market value of large international firms in
countries with a lower degree of social and economic
globalization.
There are several possible explanations for the nonsignificant moderating effects of restrictions and cultural proximity on the relationship between product
diversification and firm market value. One of the key
reasons for this may be related to how the variables are
102 Journal of International Marketing
operationalized. For example, the index of restrictions
focuses on measuring the tariff and nontariff barriers,
which represents more of an export restriction index
than an economic globalization index. Export restriction has little impact on the marketing activities of large
international firms because those firms have easy access
to foreign market opportunities through their wholly
owned subsidiaries. In addition, cultural proximity, one
of the most difficult dimensions to grasp in globalization, is captured through one measure in the secondary
database: the number of McDonald’s restaurants (per
capita) across countries (Dreher 2006). Although the
global spread of McDonald’s restaurants reflects worldwide acceptance of American cultural values, it is
arguable whether the number of McDonald’s restaurants can fully grasp the depth and breadth of cultural
proximity’s implications.
Managerial Contribution
Product management has long been considered one of
the most important marketing decisions (e.g., Gabrielsson et al. 2006; Griffith and Rubera 2014). Although
product diversification is a strategy deployed at the corporate level, marketers are involved in all phases of the
product diversification effort. Understanding the performance implications of product diversification enables
global marketers to better guide the firm-wide effort and
enhance marketing’s role in the firm.
The findings show that uncertainty avoidance has a significant positive impact on the product diversification of
large international firms. The findings highlight the
notion that high uncertainty avoidance should be a
strategic guideline for global marketers if product diversification is on the firm’s strategic agenda. To maintain
the momentum of growth and effectively diversify into
multiple product segments, global marketers must be
sensitive about environmental uncertainties and develop
reasonable measures to reduce risks.
The findings also show that cultures with low power
distance facilitate product diversification of large international firms. Product diversification is intended to
generate increased sales for large international firms
through the management of multiple and disparate
products. The strategic initiative requires firm-wide
effort, including proper capital allocation and effective
coordination among various business functions within a
firm. To promote product diversification efforts, global
marketers must maintain low power distance to facilitate information sharing within firms.
Although the findings reveal the significant effects of the
two cultural dimensions at the national level, it is important for managers to note that a conscious effort to foster a consultative and risk-averse culture at the firm
level may also contribute to product diversification
efforts. As Hofstede (1980) suggests, various subcultures exist within nations. Culture at the firm level may
have a more direct impact on firm strategy than culture
at the national level. Although national cultures are
macroenvironmental factors beyond a firm’s control,
cultures at the firm level are shapeable and can be developed in line with firm strategic initiatives.
The study also reveals the critical role of economic and
social globalization in enhancing the strategic outcomes
of product diversification. Global marketers can leverage
the benefits of economic and social globalization to facilitate the product diversification effort and achieve market success. Economic and social globalization enables
product-diversified firms not only to enjoy efficient capital management but also to achieve innovativeness
through close collaboration among workers across countries. In addition, economic and social globalization provides more accessible and homogenous customer groups,
which in turn enable product-diversified firms to generate synergies through multiple product categories and to
conduct successful marketing campaigns. When home
countries promote international trade and capital investment, encourage cross-border interpersonal communication, and provide convenient social media for interactions, global marketers must grasp the opportunity to
diversify the product portfolio and enhance the firm’s
competitive position. Global marketers also need to
know that product diversification may not always be a
good strategic choice for growth when a country’s globalization is not mature. The benefit of product diversification generated through synergy across product units is
difficult to achieve without support from integrated economic and social activities. In this case, it is beneficial for
global marketers in countries with a lower degree of
globalization to focus more on core products to generate
market success rather than spread the resources and
diversify into multiple product segments.
Limitations and Further Research
This study introduces two important macroenvironmental factors, cultural dimensions and globalization forces,
to examine the relationship between product diversification and market value of large international firms. The
findings of the study are subject to several limitations,
which provide promising avenues for further research.
First, the study provides important insights on how
product diversification affects firm market value. Future
studies might investigate additional aspects of diversification strategies, such as related or unrelated diversification and international diversification, to advance knowledge in this area. For example, research has shown that
product relatedness in the product portfolio provides different market value to firms under different economic
and institutional environments (Wan and Hoskisson
2003). Researchers have argued that diversifying into
core-business-related product segments provides better
market value than diversifying into unrelated product
segments (Markides and Williamson 1994; Wan and
Hoskisson 2003). Additional studies might explore how
the advance of globalization affects firms’ efforts to
diversify into related or unrelated product segments. Furthermore, international diversification—the practice of
locating business operations across different geographic
regions—is another important strategic initiative to
reduce investment risks and ensure market returns (Wan
and Hoskisson 2003; Wiersema and Bowen 2008).
Future studies might also examine whether product
diversification and international diversification have
complementary or conflicting influences on firm market
value. Such research efforts could further illuminate how
macroenvironmental factors affect different aspects of
diversification strategies in the global context.
Second, it is important to note that my analyses are
based on a sample of large international firms that are
listed as FGMA firms and are established, billion-dollar
globalized firms. Although a few firms on the lists have
been out of business for several years (e.g., Circuit City
in the United States), most of the firms have been successful in their industries for a long time. Large international firms provide an appropriate empirical testing
ground for the study, but it would be worthwhile for
future studies to extend research effort to cover
medium- or small-sized globalizing firms with various
levels of financial performance.
Furthermore, because of the limited availability of segment data in the Compustat industry segment database
for non-U.S.-based firms, more than two-thirds of the
sample firms are based in the United States. Additional
studies might include more BRIC firms (i.e., firms from
Brazil, Russia, India, and China) and other developing
nations, considering the increasing roles of those newly
advanced economies in the global marketplace. To
defend the use of product diversification for market success across firms of all sizes in the context of globalization requires empirical studies with broader databases.
Product Diversification and Market Value of Large International Firms 103
In addition, I used the KOF index of globalization to
capture economic and social globalization. Although
this index was developed using comprehensive country
economic and social secondary data, finer-grained measures in each index, such as restrictions and cultural
proximity, would more fully capture these globalization
variables. This would help shed additional light on firm
strategic initiatives in the global context.
Third, the study examines how Hofstede’s cultural
dimensions affect the success or failure of product diversification of large international firms with the panel
data. It is important to note that Hofstede’s cultural
dimensions are stable over time, whereas firm international marketing strategies are not. Further research
could explore how the dynamics of cultural dimensions
affect firm product diversification efforts. For example,
research on how evolving firm cultures and/or the alignment of firm cultures and national cultures influence the
success or failure of product diversification would be a
natural extension of the current study. Research in this
direction would not only provide a longitudinal view on
the evolution of firm product diversification strategy but
also enable tests of causality to enhance the theoretical
arguments.
In addition, in his conceptual article, Wan (2005) proposes that the simultaneous consideration of different
types of country resource environments, including the
economy, institutional policies, and society, will provide
a better understanding of the optimality of firm capability and product diversification strategy. Future studies
might build on the current findings and include additional macroenvironmental factors and firm capacity
variables to advance knowledge in this area. Further
research might also explore how evolving economic,
institutional, and social factors affect the success or failure of firm diversification efforts. Product diversification can be either a passive strategic reaction to the
external country resource environment or a proactive
firm strategic initiative that builds on firm capability.
Which kind of product diversification, passive or proactive, benefits the long-term development of firms under
evolving external country resource environments and
firm capability? Further research along this direction
would undoubtedly shed new light on performance
implications of product diversification.
In summary, I find that large international firms in cultures with high uncertainty avoidance and low power
distance demonstrate higher degrees of product diversification, which in turn leads to better firm market value.
104 Journal of International Marketing
I highlight the crucial role of economic and social globalization, as indicated by actual flows, personal contacts, and information flows, in the success or failure of
product diversification in large international firms.
Given the theoretical and practical importance of the
topic, international marketing literature would benefit
from further theoretical advancement and empirical
effort in this line of research.
REFERENCES
Amit, Raphael and Joshua Livnat (1988), “Diversification
Strategies, Business Cycles and Economic Performance,”
Strategic Management Journal, 9 (2), 99–110.
Arribas, Iván, Francisco Pérez, and Emili Tortosa-Ausina
(2009), “Measuring Globalization of International Trade:
Theory and Evidence,” World Development, 37 (1), 127–45.
Barr, Pamela S. and Mary A. Glynn (2004), “Cultural Variations in Strategic Issue Interpretation: Relating Cultural
Uncertainty Avoidance to Controllability in Discriminating
Threat and Opportunity,” Strategic Management Journal, 25
(1), 59–67.
Berger, Philip G. and Eli Ofek (1995), “Diversification’s Effect on
Firm Value,” Journal of Financial Economics, 37 (1), 39–65.
Bourguignon, Francois, Diane Coyle, Raquel Fernandez,
Francesco Giavazzi, Dalia Marin, Kevin O’Rourke, et al.
(2002), Making Sense of Globalization: A Guide to the Economic Issues. London: Centre for Economic Policy Research.
Bowen, Harry P. and Margarethe F. Wiersema (2005), “ForeignBased Competition and Corporate Diversification Strategy,”
Strategic Management Journal, 26 (12), 1153–71.
Bradley, Frank and Michael Gannon (2000), “Does the Firm’s
Technology and Marketing Profile Affect Foreign Market
Entry?” Journal of International Marketing, 8 (4), 12–36.
Cadogan, John W., Olli Kuivalainen, and Sanna Sundqvist
(2009), “Export Market-Oriented Behavior and Export Performance: Quadratic and Moderating Effects Under Differing
Degrees of Market Dynamism and Internationalization,”
Journal of International Marketing, 17 (4), 71–89.
Campa, Jose M. and Simi Kedia (2002), “Explaining the Diversification Discount,” Journal of Finance, 57 (4), 1731–62.
Chang, Shao-Chi and Chi-Feng Wang (2007), “The Effect of
Product Diversification Strategies on the Relationship
Between International Diversification and Firm Performance,” Journal of World Business, 42 (1), 61–79.
Chelminski, Piotr and Robin A. Coulter (2007), “The Effects of
Cultural Individualism and Self-Confidence on Propensity to
Voice: From Theory to Measurement to Practice,” Journal of
International Marketing, 15 (4), 94–118.
Performance,” Journal of International Marketing, 20 (2),
25–48.
Chiang, C.C. (2010), “Product Diversification in Competitive
R&D-Intensive Firms: An Empirical Study of the Computer
Software Industry,” Journal of Applied Business Research, 26
(1), 99–108.
Gassenheimer, Jule B. and William W. Keep (1998), “Generalizing Diversification Theory Across Economic Sectors: Theoretical and Empirical Considerations,” Journal of Marketing
Theory & Practice, 6 (1), 38–47.
Curtis, Mary B., Teresa L. Conover, and Lawrence C. Chui
(2012), “A Cross-Cultural Study of the Influence of Country
of Origin, Justice, Power Distance, and Gender on Ethical
Decision Making,” Journal of International Accounting
Research, 11 (1), 5–34.
Goold, Michael, Andrew Campbell, and Marcus Alexander
(1994), Corporate-Level Strategy: Creating Value in the
Multibusiness Company. New York: John Wiley & Sons.
Delios, Andrew and Paul W. Beamish (1999), “Geographic
Scope, Product Diversification, and the Corporate Performance of Japanese Firms,” Strategic Management Journal, 20
(8), 711–27.
Dos Santos, Marcelo B., Vihang R. Errunza, and Darius P. Miller
(2008), “Does Corporate International Diversification Destroy
Value? Evidence from Cross-Border Mergers and Acquisitions,” Journal of Banking & Finance, 32 (12), 2716–24.
Dreher, Axel (2006), “Does Globalization Affect Growth? Evidence from a New Index of Globalization,” Applied Economics, 38 (10), 1091–1110.
——— and Noel Gaston (2008), “Has Globalization Increased
Inequality?” Review of International Economics, 16 (3), 516–
36.
Graham, John R., Michael L. Lemmon, and Jack G. Wolf
(2002), “Does Corporate Diversification Destroy Value?”
Journal of Finance, 57 (2), 695–720.
Griffith, David A. and Gaia Rubera (2014), “A Cross-Cultural
Investigation of New Product Strategies for Technological and
Design Innovations,” Journal of International Marketing, 22
(1), 5–20.
Hahn, Eugene D. and Kraiwinee Bunyaratavej (2010), “Services
Cultural Alignment in Offshoring: The Impact of Cultural
Dimensions on Offshoring Location Choices,” Journal of
Operations Management, 28 (3), 186–93.
Hemerling, Jim, Dave Young, and Thomas Bradtke (2005),
“Navigating the Five Currents of Globalization: How Leading
Companies Are Capturing Global Advantage,” Boston Consulting Group, research report, (January), (accessed September 29, 2014), [available at http://www.bcgtelaviv.com/
documents/file14489.pdf].
Dwyer, Sean, Hani Mesak, and Maxwell Hsu (2005), “An
Exploratory Examination of the Influence of National Culture
on Cross-National Product Diffusion,” Journal of International Marketing, 13 (2), 1–27.
Hofstede, Geert (1980), Culture’s Consequences: International
Differences in Work-Related Values. Beverly Hills, CA: Sage
Publications.
Eisingerich, Andreas B. and Gaia Rubera (2010), “Drivers of
Brand Commitment: A Cross-National Investigation,” Journal of International Marketing, 18 (2), 64–79.
——— (1983), “National Cultures in Four Dimensions,” International Studies of Management & Organization, 13 (1/2),
46–74.
Elsas, Ralf, Andreas Hackethal, and Markus Holzhäuser
(2010), “The Anatomy of Bank Diversification,” Journal of
Banking & Finance, 34 (6), 1274–87.
——— (1994), “The Business of International Business Is Culture,” International Business Review, 3 (1), 1–14.
Engelen, Andreas, Fritz Lackhoff, and Susanne Schmidt (2013),
“How Can Chief Marketing Officers Strengthen Their Influence? A Social Capital Perspective Across Six Country
Groups,” Journal of International Marketing, 21 (4), 88–109.
Gabrielsson, Peter, Mika Gabrielsson, John Darling, and Reijo
Loustarinen (2006), “Globalizing Internationals: Product
Strategies of ICT Manufacturers,” International Marketing
Review, 23 (6), 650–71.
———, ———, and Tomi Seppälä (2012), “Marketing Strategies for Foreign Expansion of Companies Originating in Small
and Open Economies: The Consequences of Strategic Fit and
House, Robert J., Paul J. Hanges, Mansour Javidan, Peter W.
Dorfman, and Vipin Gupta (2004), Culture, Leadership and
Organizations: The GLOBE Study of 62 Societies. Thousand
Oaks, CA: Sage Publications.
Hultman, Magnus, Constantine S. Katsikeas, and Matthew J.
Robson (2011), “Export Promotion Strategy and Performance: The Role of International Experience,” Journal of
International Marketing, 19 (4), 17–39.
———, Matthew J. Robson, and Constantine S. Katsikeas
(2009), “Export Product Strategy Fit and Performance: An
Empirical Investigation,” Journal of International Marketing,
17 (4), 1–23.
Product Diversification and Market Value of Large International Firms 105
Inglehart, Ronald (1997), Modernization and Postmodernization: Cultural, Economic, and Political Change in 43
Societies. Princeton, NJ: Princeton University Press.
Möller, Jana and Martin Eisend (2010), “A Global Investigation
into the Cultural and Individual Antecedents of Banner Advertising Effectiveness,” Journal of International Marketing, 18
(2), 80–98.
Jones, Gary K. and Herbert J. Davis (2000), “National Culture
and Innovation: Implications for Locating Global R&D Operations,” Management International Review, 40 (1), 11–39.
Olzak, Susan (2011), “Does Globalization Breed Ethnic Discontent?” Journal of Conflict Resolution, 55 (1), 3–32.
Katsikeas, Constantine S., Saeed Samiee, and Marios Theodosiou (2006), “Strategy Fit and Performance Consequences
of International Marketing Standardization,” Strategic Management Journal, 27 (9), 867–90.
Palich, Leslie E., Laura B. Cardinal, and C.C. Miller (2000),
“Curvilinearity in the Diversification–Performance Linkage:
An Examination of over Three Decades,” Strategic Management Journal, 21 (2), 155–74.
Kemper, Jan, Andreas Engelen, and Malte Brettel (2011), “How
Top Management’s Social Capital Fosters the Development of
Specialized Marketing Capabilities: A Cross-Cultural Comparison,” Journal of International Marketing, 19 (3), 87–112.
——— and Luis Gomez-Mejia (1999), “A Theory of Global
Strategy and Firm Efficiencies: Considering the Effects of
Cultural Diversity,” Journal of Management, 25 (4), 587–
606.
Kirkman, Bradley L., Kevin B. Lowe, and Cristina B. Gibson
(2006), “A Quarter Century of ‘Culture’s Consequences’: A
Review of Empirical Research Incorporating Hofstede’s Cultural Values Framework,” Journal of International Business
Studies, 37 (3), 285–320.
Paul, Pallab, Abhijit Roy, and Kausiki Mukhopadhyay (2006),
“The Impact of Cultural Values on Marketing Ethical Norms:
A Study in India and the United States,” Journal of International Marketing, 14 (4), 28–56.
Ladbury, Jared L. and Verlin B. Hinsz (2009), “Uncertainty
Avoidance Influences Choices for Potential Gains but Not
Losses,” Current Psychology, 28 (3), 187–93.
Lang, Larry H.P. and René M. Stulz (1994), “Tobin’s q, Corporate Diversification, and Firm Performance,” Journal of Political Economy, 102 (6), 1248–80.
Power, Damien, Tobias Schoenherr, and Danny Samson (2010),
“The Cultural Characteristic of Individualism/Collectivism: A
Comparative Study of Implications for Investment in Operations Between Emerging Asian and Industrialized Western
Countries,” Journal of Operations Management, 28 (3), 206–
222.
Levitt, T. (1983), “The Globalization of Markets,” Harvard
Business Review, (May/June), 92–102.
Ravichandran, T., Yu Liu, Shu Han, and Iftekhar Hasan (2009),
“Diversification and Firm Performance: Exploring the Moderating Effects of Information Technology Spending,” Journal
of Management Information Systems, 25 (4), 205–240.
Lins, Karl and Henri Servaes (1999), “International Evidence on
the Value of Corporate Diversification,” Journal of Finance,
54 (6), 2215–39.
Schwartz, Shalom H. (1994), “Are There Universal Aspects in
the Structure and Contents of Human Values?” Journal of
Social Issues, 50 (4), 19–45.
Lippert, Susan K. and John A. Volkmar (2007), “Cultural
Effects on Technology Performance and Utilization: A Comparison of U.S. and Canadian Users,” Journal of Global Information Management, 15 (2), 56–90.
Snijders, Tom A.B. and Roel Bosker (1999), Multilevel Analysis:
An Introduction to Basic and Advanced Multilevel Modeling.
Thousand Oaks, CA: Sage Publications.
Lund, Donald J., Lisa K. Scheer, and Irina V. Kozlenkova
(2013), “Culture’s Impact on the Importance of Fairness in
Interorganizational Relationships,” Journal of International
Marketing, 21 (4), 21–43.
Luo, Xueming and C.B. Bhattacharya (2006), “Corporate
Social Responsibility, Customer Satisfaction, and Market
Value,” Journal of Marketing, 70 (October), 1–18.
Markides, Constantinos C. and Peter J. Williamson (1994),
“Related Diversification, Core Competences and Corporate
Performance,” Strategic Management Journal, 15 (S2), 149–65.
Miller, Kent D. (1992), “A Framework for Integrated Risk
Management in International Business,” Journal of International Business Studies, 23 (2), 311–31.
106 Journal of International Marketing
Tung, Rosalie L. and Alain Verbeke (2010), “Beyond Hofstede
and GLOBE: Improving the Quality of Cross-Cultural
Research,” Journal of International Business Studies, 41 (8),
1259–74.
Varadarajan, P.R. (1986), “Product Diversity and Firm Performance: An Empirical Investigation,” Journal of Marketing, 50
(July), 43–57.
Wan, William P. (2005), “Country Resource Environments,
Firm Capabilities, and Corporate Diversification Strategies,”
Journal of Management Studies, 42 (1), 161–82.
——— and Robert E. Hoskisson (2003), “Home Country
Environments, Corporate Diversification Strategies, and
Firm Performance,” Academy of Management Journal, 46
(1), 27–45.
Wiersema, Margarethe F. and Harry P. Bowen (2008), “Corporate Diversification: The Impact of Foreign Competition,
Industry Globalization, and Product Diversification,” Strategic Management Journal, 29 (2), 115–32.
Yli-Renko, Helena and Ramkumar Janakiraman (2008), “How
Customer Portfolio Affects New Product Development in
Technology-Based Entrepreneurial Firms,” Journal of Marketing, 72 (September), 131–48.
Product Diversification and Market Value of Large International Firms 107
Copyright of Journal of International Marketing is the property of American Marketing
Association and its content may not be copied or emailed to multiple sites or posted to a
listserv without the copyright holder's express written permission. However, users may print,
download, or email articles for individual use.
Cultural Dimensions Paper
Paige Piatnichko
MBAC611 MBA Cornerstone
Regis University
April 9, 2017
Introduction
The Four Cultural Dimensions
1. Individualism-Collectivism
This dimension “reflects how members of a society perceive relationships with
their immediate groups”.
2. Uncertainty Avoidance
This dimension “pertains to the general attitude toward uncertainty and
ambiguity”.
3. Power Distance
This “examines whether unequal distribution of power is a social norm in the
society”.
4. Masculinity-Femininity
This “addresses how dominant values in a society reflect the traditional
distribution of roles between genders”.
How each Cultural Dimension Affects Product Diversity in an International Business
Setting
Conclusion
References
Purchase answer to see full
attachment