Are International and Product Diversification Substitutes or Complements? Theoretical and Empirical Perspectives

Abstract

Research summary Extant research offers conflicting evidence on the nature and performance implications of a relationship between a firm's decision to expand (diversify) into new geographic and product markets; this article views that as being due to the lack of a consistent conceptual framework that incorporates and links both types of diversification. Accordingly, this article presents a consistent theoretical framework to identify and characterize alternative relationships between these two types of diversification strategies and what it might mean to characterize a particular relationship as evidencing substitution or complementarity. We show that the interplay between a firm's unique but limited resources and its particular market environment implies alternative and idiosyncratic relationships between these two diversification strategies, and we offer guidance on empirical approaches for investigating the identified relationships. Managerial summary This article presents a consistent theoretical framework to identify and characterize alternative relationships between a firm's decision to expand (diversify) into new geographic and product markets and what it might mean to characterize a given relationship as being one of substitutes for complements. Such characterization implies alternative performance outcomes when jointly engaging in these types of diversification strategies. We show that a firm's unique but limited resources and its particular market environment give rise to alternative and idiosyncratic relationships between these two types of diversification strategies, and we provide guidance on empirical approaches for investigating the identified relationships. Copyright © 2017 Strategic Management Society.

Research Methodology in Global Strategy Research

“…However, these studies treated product line and geographic diversification as independent explanatory variables within a single equation of firm performance. As noted by Bowen and Sleuwagen (, this issue), this estimation approach carries the underlying assumption that product line diversification and international diversification are independent, uncorrelated decisions.…”

“…Hence, proper analysis requires examining both decisions simultaneously (Cantwell & Piscitello, ; Mudambi & Mudambi, ). Bowen and Sleuwagen (, this issue) take the approach of assessing whether the two strategies are substitutes or complements. This is an empirically sound and academically valuable exercise.…”

“…These are just a few potential avenues for future research. The work of Bowen and Sleuwagen (, this issue) represents an excellent step along a path toward better analysis of global strategy. However, it is important to recognize the broader aspects of the open research questions and to anchor them in extant global strategy research.…”

“…The four articles included in the special issue scrutinize very different research methodologies, spanning from the application of Dahl's technique to account for endogeneity in location decisions in foreign markets (Wu, Salomon, & Martin, , this issue) to using computer‐aided text analysis (CATA) on the concept of a global mind‐set (Belderbos, Grabowska, Leten, Kelchtermans, & Ugur, , this issue) to using propensity score matching and differences‐in‐differences in the analysis of the relationship between internationalization and performance (Chang & Chung, , this issue) to the study of complementary and substitution in the analysis of the relationships between internationalization and diversification (Bowen & Sleuwagen, , this issue). The logics of the different techniques are outlined and scrutinized, while the critical procedures of the techniques are illustrated on actual research questions of global strategy.…”

Importing exporters and exporting importers: A study of the decision of Chinese firms to engage in international trade

“…Evidence of a substitution effect between international and product diversification is shown by Kumar (), Mayer et al. () and Bowen and Sleuwaegen ().…”