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This paper draws from performance feedback theory and the resource-based view of the firm to study divestiture activity. We argue that the extent and nature of resource reconfiguration through divestiture may be affected by both high and low extremes of performance relative to a firm’s historical aspirations. Based on analysis of divestiture counts, we find that firms with increasing performance, especially when they also have high levels of performance, appear to use divestitures in a “complementary Penrose effect” that frees resources firms can use for future growth, with the greatest impact on the number of partial rather than full divestitures. With more limited data on divestiture value, we find relationships of both increasing and decreasing performance with divestiture activity. The study uses longitudinal segment-level data for firms operating in the global pharmaceutical industry between 1999 and 2009.

Asset reconfiguration by both growth and divestiture underlies business transformation, but reconfiguration remains poorly understood in countries with limited market infrastructure. We argue that more developed infrastructure facilitates resource reconfiguration, assisting weak firms' attempts to retrench and strong firms' attempts to grow; in turn, market development shapes the impact of reconfiguration by enhancing the benefits of adding assets and limiting the benefits of divestitures. We examine reconfiguration activity by 1,256 firms based in eight South East Asian economies-Hong Kong, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan, and Thailand-from 1990 to 1999 INTRODUCTIONAsset reconfiguration is an important means of resource development for firms throughout the world. Studies of business dynamics have demonstrated that reconfiguring resources via modes such as acquisitions, alliances, internal development, and divestiture influences firm performance (Capron, 1999; Mitchell, 2000, 2004;Moliterno and Wiersema, 2007). The studies show that the motivation to reconfigure a firm's resource base can come from two sources: financial distress, where struggling firms face pressure to reconfigure resources in attempts to increase their operating efficiency (Bibeault, 1982;Robbins and Pearce, 1992), and financial strength, where strong firms reconfigure resources to improve their competitive position (Hopkins, 1991;Montgomery and Thomas, 1988;Koza, Tallman, and Ataay, 2011). In addition to such firm-level sources, studies of international business and institutional environments have argued that the extent of market development strongly affects business strategy and performance (Nelson, 1995;Hoskisson et al., 2000;Cuervo-Cazurra and Dau, 2009). To date, though, studies of asset reconfiguration primarily focus on firms operating in countries with well-developed market infrastructure, without considering how market development itself affects the extent to which firms are able to undertake different forms of resource reconfiguration and how Keywords: growth; acquisitions; divestiture; asset reconfiguration; institutional environment *Correspondence to: Will Mitchell, Duke University, The Fuqua School of Business, 1 Towerview Dr., Durham, NC 27708, U.S.A. E-mail: willm@duke.edu Global Strategy JournalGlobal Strat. J., 1: 6-26 (2011) Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1111DOI: 10. /j.2042DOI: 10. -5805.2011 Copyright © 2011 Strategic Management Society reconfiguration, in turn, affects firm performance in different environments. This study argues that stronger market-oriented institutions facilitate resource reconfiguration, helping weak firms retrench and strong firms grow; in turn, market development enhances the benefits of adding assets, but limits the benefits of divesting assets.We frame the study by drawing on studies of asset reconfiguration, especially the resource-based and dynamic capabilities theories of business strategy (Helfat et al., 2007;Penrose, ...

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Research summary: Studies of how divestitures affect firm performance offer mixed results. This paper unpacks relationships between divestitures and subsequent performance, focusing first on the moderating role of prior performance and then on mechanisms through which divestitures by higher-and lower-performing firms affect performance. The study suggests that divestitures can exacerbate weakness and reinforce strength: divestitures by lower performers improve profits but inhibit sales growth and tend to speed the firms' exits as independent actors; by contrast, higher-performing divesters invest in support of existing assets and gain new growth, while avoiding becoming acquisition targets. Most generally, divestitures help reduce constraints to changing a firm's resource base, which we refer to as a complementary Penrose effect.