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Modeling the dynamics of firms’ international and product market diversification strategy: the case of U.S. firms’ response to late 20th century globalization

Harry P. Bowen (McColl School of Business, Queens University of Charlotte, Charlotte, North Carolina, USA)
Leo Sleuwaegen (Department of Managerial Economics, Strategy and Innovation, KU Leuven, Leuven, Belgium)

Review of International Business and Strategy

ISSN: 2059-6014

Article publication date: 18 May 2023

Issue publication date: 7 November 2023

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Abstract

Purpose

This paper aims to derive and estimate a theory-based empirical specification that models a firm’s choices of its international diversification (ID) and product diversification (PD) and how they evolve over time in response to shocks that alter the relative cost and relative profitability of ID and PD.

Design/methodology/approach

We use longitudinal data on U.S. manufacturing firms from 1984 to 1999, a period of intense shocks associated with rapid globalization, to estimate a dynamic panel data Tobit model that permits lags in a firm’s adjustment to its optimal mix of ID and PD over time.

Findings

We find strong support for the theoretical framework underlying our empirical specifications and posited dynamics, with full adjustment estimated to require, on average, 1.5 years, a finding with implications for the time spacing of observations in empirical studies of ID and PD to avoid biased inferences. Among the globalization shocks during the time period studied, our results indicate that global competitive pressures and efficiency gains from global supply integration to be the more important factors driving U.S. firms toward greater ID relative to PD. Augmentation of firms’ organizational (managerial) and physical capital resources is also found to be important for supporting an expansion of ID relative to PD. Technological resource augmentation is instead found to favor expansion of PD relative to ID.

Originality/value

Our empirical specification is novel. It readily incorporates an often ignored but necessary theoretical condition that defines a firm’s optimal choices of its ID and PD, and it allows observed choices at a point in time to deviate from their optimal values.

Keywords

Acknowledgements

Harry P. Bowen acknowledges support for this research as the W.R. Holland Chair of International Business and Finance at Queens University of Charlotte.

Citation

Bowen, H.P. and Sleuwaegen, L. (2023), "Modeling the dynamics of firms’ international and product market diversification strategy: the case of U.S. firms’ response to late 20th century globalization", Review of International Business and Strategy, Vol. 33 No. 5, pp. 869-888. https://doi.org/10.1108/RIBS-11-2022-0106

Publisher

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Emerald Publishing Limited

Copyright © 2023, Emerald Publishing Limited

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