Another Look at the Role of the Industrial Structure of Markets for International Diversification Strategies

Abstract

This paper re-examines the extent to which gains to international diversification are due to differences in industrial structure across countries. Recent papers by Roll (1992) and Heston and Rouwenhorst (1994) investigate this issue and find conflicting evidence. Using a new database, the Dow Jones World Stock Index, with coverage in 25 countries and over 66 industry classifications, we are able to decompose comprehensively both country and industrial sources of variation. We confirm the previous finding that little of the variation in country index returns can be explained by their industrial composition. We also uncover differences in the proportion of variation in industry index returns that is captured by country and industry factors. The implications for global diversification strategies are discussed.