A mid-range theory of the interactive effects of international and product diversification on innovation and performance

Abstract

Some research in international management has focused on international diversification as a strategy, while substantial research in strategic management has focused on product diversification. However, corporate strategies may include both product and geographic international diversification components. Furthermore, little theoretical work has linked the interaction of these two strategies to innovation and performance. This paper develops theoretical arguments depicting the interactive effects of international and product diversification in a comprehensive model. The theory presented suggests that international diversification is positively related to both innovation and firm performance, and positively moderates the relationship between product diversification and innovation and performance. The central concept is that innovation is generally facilitated by international diversification, while the general relationship between product diversification and innovation is negative. However, because of the complexity and information asymmetries, it is difficult to manage internationally diversified firms. Additionally, it is difficult to achieve global integration and local responsiveness in highly internationally diversified firms. Thus, there are limits to international diversification, but, given appropriate firm capabilities and country circumstance, international diversification facilitates innovation and performance.