Diversification Strategies of Developing Country Firms PDF

Journal of International Management 5 (1999) 115140
Diversification strategies of developing country firms

Lilach Nachum*
Cambridge University, ESRC Center for Business Research, Sidgwick Avenue, Cambridge CB3 9DE, United Kingdom
Abstract Large diversified firms have been a dominant factor in the economies of many developing countries. Nonetheless, they have received only limited research attention, and consequently our knowledge of the nature and extent of their behaviour is limited. This research sought to contribute to filling this gap. Analysis of 163 diversification moves undertaken by 44 firms in various developing countries shows a considerable variation across developing regions and over time in terms of the objectives that drive the diversification activities and the strategies pursued to implement them. This variation can largely be attributed to specific characteristics of countries and regions that affect the behaviour of firms. 1999 Elsevier Science Inc. All rights reserved.
Keywords: Developing country firms; Diversification; Strategies
1. Background The literature on firms diversification has focused almost exclusively on developed country firms. The main issues addressed by this literature are the identification of the motives that drive firms diversification (Dixon, 1994), organisational and technological characteristics of diversified firms (Channon, 1973; Rumelt, 1974; Dyas and Thanheiser, 1976; Penings et al., 1994; Chen, 1996; Argyres, 1996), and the impact of the diversification on their performance (Montgomery and Wernerfelt, 1988; Wernerfelt and Montgomery, 1988; Nguyen and Devinney, 1994; Markides, 1995; Markides and Williamson, 1996; Tallman and Li, 1996). With few exceptions, the theoretical concepts are drawn from the experience of developed country firms, and the studies that sought to test them empirically are based on data collected from this population of firms. The neglect of developing country firms is surprising as these firms are often well diversified and maintain an influential position in their economies. Furthermore, their diversifica* Tel.: 44 1223 335292; fax: 44 1223 335768. E-mail address: LN207@econ.cam.ac.uk (L. Nachum) 1075-4253/99/$ see front matter 1999 Elsevier Science Inc. All rights reserved. PII: S1075-4253(99)00009-5
116
L. Nachum/Journal of International Management 5 (1999) 115140
tion activities seem to differ fundamentally from those of their developed country counterparts, and the validity of knowledge based on the latter to the former is thus often limited. There are several grounds for these differences. First, developing country firms are, on a whole, less advanced in their managerial and technological knowledge compared with developed country firms, and subsequently different diversification options are available to these two groups of firms. Second, most diversification activities of developed country firms have been within manufacturing and services, and the focus of the literature that sought to study their behaviour has been on diversification within these sectors. Less experience is thus documented regarding the special difficulties and opportunities associated with diversification from commodities, which has been the most typical route of the diversification of developing country firms. Third, the macroeconomic conditions faced by developed country firms (e.g., growth rate of their economies and competitive pressures) differ from those that developing country firms confront, and these differences affect their diversification activities and the set of issues associated with them. The few studies that have examined the diversification of developing country firms highlight the unique characteristics of their activities and the need for research that will address these specific features. These include Amsden (1989, 1998) of South Korean firms; Amsden (1991) of Taiwanese firms; Lim and Teck (1995) of Singapore manufacturing and service firms; Batra and Aw (1998) of Taiwanese manufacturing firms; Cho and Park (1998) and Chang and Choi (1988) of South Korean cheabols; Ghemawat and Khanna (1998) and Khanna and Palepu (1997, 1998) of Indian and Chilean firms. The recent financial crises of the Asian countries have attracted much attention to these firms. The wide range of the diversification of Asian firms, along with the huge debt they have accumulated, were maintained to be a main cause for the crises and their brutality (see for example, The Economist, 1997a, 1997c, 1998a; Business Week, 1998). The financial crises also have raised doubts regarding the nature of the impact of the large diversified firms on their economies. Diversified firms were regarded as a main vehicle for the industrialisation of developing countries (see Amsden, 1989, 1991, 1998), similar to the role that such firms played in the past in the developed countries, when they were industrialising (Chandler 1977, 1990). This approach has driven countries to encourage the emergence of large diversified firms as a way to accelerate their industrialisation. The recent attempts of China and India to transform state-owned firms into large diversified firms, by using South Korea diversified firms (the chaebols) as their main model (The Economist, 1997d, 1997e, 1997f) suggest examples for such an approach. However, as a reaction to the financial crises, rather than a vehicle for growth, large diversified firms are maintained to be the cause of concentration of power that has prevented the development of smaller entrepreneurial firms essential for economic vitality1. These developments have made the study of the activities of these firms of special interest and call for an analysis that will allow a better understanding of their behaviour, which is the purpose of the present study.
1 Such an attitude has been expressed, for example, in recent writings on the Taiwanese economy that has encouraged the development of small firms and allowed them to fail (Aw et al., 1997; Business Week, 1998a; The Economist, 1997b) and has indeed escaped many of the consequences of the crisis.
117
The study proceeds as follows. In the next section, I outline the context in which the activities of developing country diversified firms take place and some salient characteristics of their behaviour and highlight the ways in which they differ from their developed country counterparts. Section 3 describes the methodology used to gather the data that document their activities. Section 4 brings the main findings that emerge from analysis of data provided by 44 developing country diversified firms that reported on their experience in 163 diversification moves. It is followed by a statistical examination of the explanatory power of certain societal characteristics for the diversification of firms, by using the contextual analysis procedure. The article concludes by summarising the main findings and suggesting directions in which future research may make progress. 2. Developing country diversified firms Diversified firms are a common phenomenon in many developing countries, particularly in the more advanced ones, such as Argentina, Brazil, India, Malaysia, Mexico, South Africa, South Korea, Taiwan, Thailand, and Turkey. Their emergence is considered a response to several structural characteristics that have led to the development of diversified firms of distinguished type and nature (Leff, 1978, 1979; Amsden, 1989, 1998). A notable characteristic of developing country diversified firms is the wide range of their diversification activities, which tend to be opportunistic and technologically unrelated and directed towards areas where no special technological skills are required. Subsequently, they comprise many businesses that have no relations to one another whatsoever. While the dominant trend among developed country firms during the last two decades has been towards deconglomeration and corporate focus (Berger and Ofek, 1995; Servaes, 1996; Sadtlet et al., 1997), developing country firms have been growing rapidly and have diversified widely into unrelated areas (Gereffi, 1990; Prendergast, 1990; Koike, 1993; Amsden and Hikino, 1994; Benavente, 1996). South Korean chaebols have taken this approach to an extreme (Ungson et al., 1997). The largest chaebols have been active in well over 100 different unrelated businesses (The Economist, 1997c). Samsung, one of the largest chaebols, has 166 different businesses, and it has grown tenfold every six years since the 1960s (The Economist, 1997a). Other developing country firms are also well diversified, though the range of their activities may not be as wide2. Several closely related reasons explain these diversification patterns. First, many domestic markets are too small to provide sufficient growth opportunities within a single product group, and developing country firms were often unable to compensate for the small size of
There are of course examples of deconglomeration and focus among developing country firms, but these are rare. JCI a South African mining finance house suggests one. The firm was established in its current form after a restructuring of the well-diversified Johnnies in 199495. Before the restructuring, Johnnies had interests in areas as diverse as mining, finance, media breweries, and cars. The restructuring was driven by the realisation that there is little synergy between the various parts of the group. Peter Perkins, an economist in JCI wrote to UNCTAD: . . . In our experience, diversification in the past has resulted in a lack of managerial focus and a failure to maximise market ratings, as measured by share prices. The initiatives at JCI Limited since its listing in 1995 have resulted in a 52% appreciation in the share price compared with a rise of 31% in the share price index of Johannesburg Stock Exchange mining house. . . . Our advice . . . would be to limit diversification to one commodity group, unless [there is] a clear rationale for doing otherwise. (correspondence with UNCTAD, 21 April 1997).
2
118
their domestic markets by exports or investment abroad, because they were not competitive in world markets. During the last decade or so there has been a considerable growth of their international activity (see UNCTAD-DTCI [1997] and UNCTAD [1997a] for documentation of their international activity via FDI and exports, respectively), but diversification into other areas of economic activities has remained a main route of growth. Second, wide and unrelated diversification has an obvious appeal in economies subject to risks and to the uncertainties of instability and rapid structural change and is driven, in part, by an effort to alleviate these factors and to avoid the risk inherent in specialising in a narrow product range. Diversification is often undertaken as a response to market failures, common in many developing countries. Such market failures make it costly for firms to acquire through the market necessary inputs, such as finance, technology, and management talents (Khanna and Palepu 1997, 1998). Diversified firms, which can obtain these inputs internally, thus enjoy a considerable advantage. Third, developing country firms have, for the most part, been catching up rather than leading in the creation of new technology. Rather than developing their own technology, they have tended to rely heavily on technology acquired externally. Consequently, they lack a proprietary technology to exploit in closely related areas, which is a dominant reason for focus or diversification into closely related areas (Chandler, 1977, 1990), a situation that has facilitated wide diversification into diverse and unrelated areas (Amsden and Hikino, 1994; Benavente, 1996). Furthermore, such diversification is a big gamble, because a firm enters many new areas in which it does not have any expertise or knowledge. Many developing country firms have been able to do it successfully because they have bought the technical expertise and thus avoided the risk associated with the development of new technologies. In the absence of proprietary technology, and the subsequent diversification into unrelated areas, developing country diversified firms have developed advantages in conglomeration per se (Amsden and Hikino, 1994; Amsden, 1998). They excel in generic skills, originating from the acquisition of foreign technology, which are applicable to many industries, in rapid and cost-effective entry into new industries and in related activities, such as feasibility studies, task force formation, training, new plant design and construction, and operation start-up. Their advantages in these activities have become an invaluable competitive asset and have allowed them to move into new industries rapidly and at relatively low costs. Once a group developed project execution capabilities in one industry, top management could transfer such capabilities from industry to industry. Diversification itself thus became a source of economy of scope, and there were considerable benefits to be gained from diversifying further, a situation that has further accelerated the expansion of these firms. An additional notable characteristic of diversified firms in developing countries, which has affected the nature of their diversification activities, is their ownership structure. While in most developed countries family ownership has long been dropped in favour of ownership forms that provide financial resources and allow professional management, the majority of developing country diversified firms are family owned and controlled3. By the 1990s, there
It should, however, be noted that the family is not always the major shareholder of these firms. Often, the family keeps the control and management but not necessarily majority ownership (Hattori, 1984; The Economist,
119
is some conflicting evidence that family ownership was weakening in several developing countries, but the leading groups have remained family controlled and managed in most of them. For two main reasons, family businesses attempt to create highly diversified groups, often in unrelated areas. First, the owner families seek to diversify their business lines and products to spread risk (Suehiro, 1993). Evidence suggests that managers who own their firms are more likely to diversify due to their greater need for risk reduction (see for example, Danis et al., 1997). Second, the generation transition within the business group tends to facilitate diversification. The tradition in many developing countries (notably the Asian countries) requires dividing the firm so that each son gets an equal part in it (Hattori, 1984). To avoid the consequences of splitting the firm over and over, and at the same time to meet the pressing need of finding work for the younger generations, firms diversify at accelerated rates, and into industries completely different from the initial family business. Finally, the recent string of financial crises in Asia has exposed the fact that the wide diversification of many developing country firms has depended critically on the support of governments and on the cheap money they supplied. Developing country governments have played a dominant role in the emergence and the subsequent growth of diversified firms. Firms have often diversified in response to policy distortions, including ones that are not, or not explicitly, intended to encourage such outcome (Ghemawat and Khanna 1998). For example, sales-based rather than value-added taxation of products has played an important role in encouraging vertical integration. Inward looking trade policies pursued by many developing countries, notably during the 1960s and 1970s, often forced firms based on imported factors of production to enter new businesses. In addition to this somewhat indirect role, the governments of some developing countries have actively and directly encouraged the development of large diversified firms, by providing selected firms favourable conditions, such as access to bank loans at attractive interest rates. These policies allowed firms to expand into new fields without worrying about rate of return and encouraged their opportunistic selection of industries towards which their diversification took place. In the discussion so far, we have ignored differences among firms based in various developing regions as well as within these regions. Such variation is often very large, though it has received only limited research attention, and often can only be supported by anecdotal observations. For example, whereas the largest Asian diversified firms are very large and well diversified, their Latin American counterparts are smaller and tend to be less diversified. Scattered evidence suggests that diversification in Latin America is less technologically unrelated than in Asia. These differences became apparent recently. In response to the changing competitive situation at home, several leading Latin American diversified firms have consolidated their business in an attempt to focus on their core activities and have expanded geographically. Examples include Mexicos Cemex and Argentinas oil firm YPF,
1997b). For example, the members of the Birla family, the founder of the largest Indian group Birla, owned in the early 1980s less than 2% of the ordinary shares of the group (Ito, 1984). In spite of such minority shareholding, the family control is not challenged by outsiders for two main reasons. First, when these firms issue equity, it is usually in the form of nonvoting shares, which do not threaten family control. Second, the family members own many related firms, which are tied to the group as suppliers, customers, etc., and they help to maintain the familys control over the group (Ito, 1984).
120
which have recently become multinationals in their core activity. By contrast, Asian conglomerates, notably South Korea chaebols, have fount it hard to withdraw from their enormous number of businesses even in response to the recent financial crises and the large pressure of their governments and the IMF (Newsweek, 1997; The Economist, 1998a). Furthermore, foreign firms have been an integral part of the diversification activities of many Latin American countries, whereas in most Asian countries as well as in the Middle East, local private firms are the main industrial actors. Asian firms, notably the chaebols in South Korea and the largest Middle East firms, refuse the equity participation of foreign enterprises. By contrast, Latin American firms, such as Mexicos grupos, have aggressively sought opportunities for joint ventures (UNCTAD-DTCI, 1997). There are also considerable differences among firms within regions. For instance, Taiwan has a predominance of small and medium-sized firms, while South Koreas economy is controlled by huge conglomerates, the chaebols. State-owned firms are still quite important in Taiwan but are relatively insignificant in South Korea (Gereffi, 1990). While in most Asian countries, family control and ownership is the norm, the proportion of corporate firms among the large firms in Thailand has been rising substantially over the last decades (due mostly to the increasing presence of foreign firms). Some of this variation is illustrated and discussed in the empirical analysis that follows.
3. The firms studied and the questionnaire The study of the diversification activities and strategies of developing country firms was based on data collected through a mailed questionnaire that was distributed to a sample of diversified firms in a range of developing countries. Firms were drawn for the study from the database World global scope: corporate information on the worlds leading companies. This database lists the largest 14,000 firms worldwide, according to (a) sizethe largest firms in the stock exchanges in their countries, and (b) profitabilitythe firms that yield the highest earning per share. To be included in the study, firms had to meet the criteria discussed in the following sections. 1. Firms must operate in more than one area of economic activity and acquire no more than 90% of their sales from their main product group. The operationality of this criterion requires a clear definition of area of economic activity. The ambiguity inherent in the concept of a product or an industry besets both conceptual definition of areas of economic activity and its measurement. Indeed, there is no generally accepted definition or measure of diversification and the definitions used by researchers vary considerably. What diversification implies depends on the grouping of commodities defined as a single product. In defining diversification, we follow the distinction initially made by Rumelt (1974) and adopted by many analyses on diversification (see for example, Dyas and Thanheiser, 1976; Argyres, 1996; Chen, 1996; Markides, 1995; Markides and Williamson, 1996; Tallman and Li, 1996). A diversification move is taken to be any entry into a new product activity that requires or implies an appreciable increase in the available managerial competence within the firm. A 4-digit Standard Industrial Classification (SIC) classification is commonly adopted for the actual mea-
121
surement and is the one used in the present study. This definition is likely to lead to under representation of vertically integrated firms. Because the activities of such firms are, by definition, within a single product group, they are often classified as singleproduct firms. Subjective judgements were made in these cases, based on a review of secondary sources (such as firms annual reports and qualitative information provided by the database World global scope). 2. The firm must be the core industry/ies from which the firms diversified is a commodity industry. We have narrowed our observations to firms that diversified from commodities because historically the economies of all the countries classified as developing countries were based heavily on commodities. Thus, the diversification activities of their firms, for the most part, started from commodities. Certain characteristics of commodities (such as specific combination of capital and labour, heavy reliance on unskilled and low-skilled labour) suggest that the diversification activities of commodity firms may differ from those of firms engaged in manufacturing or services. By focusing on this type of diversification, we could remove the heterogeneity related to sectoral differences and identify the salient characteristics of diversification from this sector. Commodity industries are classified according to the classification of the Federal Statistical Policy and Standards Office of the U.S. Department of Commerce. 3. Firms are headquarters in a developing country. This requirement excludes from the study affiliates of foreign firms active in the developing countries. The UN classification of countries at various levels of economic development was followed for the categorisation of developing countries. Approximately 300 firms met these criteria and were selected to be the focus of the empirical work. A questionnaire was mailed to these firms in spring 1997, in which they were asked to provide information regarding each of the five most significant diversification moves they have implemented. For the most part, the unit of analysis in the questionnaire (and consequently in the analysis that follows) was a diversification move, rather than a firm, since different diversification moves undertaken by a single firm can often vary considerably, in a manner that may prevent meaningful generalisations. The questionnaire consisted of four sections. The first was designed to gather information regarding the objectives of different diversification moves. It was followed by a section that referred to the planning and the formulation of strategies for competing in the new areas of activity. The third section sought to explore the activities pursued to implement the diversification moves, and the fourth asked for firms assessment of the success of the diversification and its impact on their overall performance. This article reports the main findings of the first three sections. In a second article, we address the findings of the last section. Forty-four firms returned complete questionnaires (14.6% response rate) in which they reported on their experience in the implementation of 163 diversification moves4. Table 1 presents some characteristics of the sample. A Chi-Square goodness-of-fit test was conducted to estimate the extent to which the respondents represent the population of the firms approached with respect to their size and the intensity of their diversification (measured by the number of
4
Some firms reported on less than five diversification moves, because they had not diversified five times.
122
Table 1 Characteristics of the firms surveyed Diversification intensity (no. of products, 4-digit SIC) 4.428 (1.618) 2.000 (1.000) 3.750 (0.500) 3.687 (1.701) 2.000 (na) 4.000 (1.000) 5.000 (2.645) 3.666 (0.577) 3.690 (1.615) 4.142 (2.035) 1.666 (0.577) 4.461 (1.560) 3.416 (1.240) 3.142 (1.345) 3.690 (1.615)
By Industry1 Agriculture products Mining Oil and gas extraction Food and tobacco Textile Chemicals Petroleum products Primary metal Total sample By region2 Asia Middle East Southeast Asia Latin America Africa Total sample
1
n 7 5 4 16 2 3 3 4 44 7 4 13 12 8 44
Size (revenues in dollars) 648,817 (1,078,710) 1,283,721 (2,126,205) 707,271 (1,142,011) 767,356 (1,055,980) 337,442 (na) 909,297 (1,280,084) 185,886 (138,607) 248,658 (330,971) 748,634 (1,162,576) 485,521 (1,104,736) na 561,969 (916,237) 1,316,006 (1,493,821) 240,627 (394,663) 748,634 (1,162,576)
Values in parentheses represent standard deviation. The core industry from which firms diversified. 2 Classification of countries into regions. Number of responses from each country appear in parentheses: Africa: Egypt (2); South Africa (6). Asia: India (4); Pakistan (1); Sri-Lanka (2). Middle East: Saudi Arabia (1); United Arab Emirates (3). Southeast Asia: Indonesia (2); Hong-Kong (1); Malaysia (7); Taiwan (3). Latin America: Argentina (3); Brazil (2); Chile (3); Colombia (1); Mexico (2); Peru (1).
4-digit SIC product groups in which a firm is active). The null hypothesis was rejected in both cases at the 0.05 level of confidence. A major reason for refusal to complete the questionnaire was that the firms approached did not consider themselves as diversified firms and therefore felt that the questionnaire is not applicable to them (see Fig. 1). Another reason for the low response rate (compared with what is expected in similar surveys of developed country firms [see Fowler, 1988; Zikmund, 1994]) is that most firms approached are family owned, an ownership structure that is reluctant to share information. 4. The empirical findings 4.1. Objectives of the diversification Different objectives drive the diversification activities of firms. This variety reflects the complex nature of diversification moves, where multiple objectives may be at work, some-
123
times even at a single diversification move. It would be useful to know whether certain diversification objectives, or cluster of objectives, predominate, and whether there are some industrial or geographical patterns in their variation. Such knowledge would suggest degree of plausibility and importance for the various objectives that underlie firms behaviour. (See Fig. 2) The analysis in Table 2 shows that the dominating objective for the diversification of the firms surveyed is the search for growth. Thirty-seven and twenty percent of all diversification moves were driven by this factor as the first and the second objectives, respectively, far ahead of most other objectives. In light of the modest ability of developing country firms to grow via geographic expansion, product diversification is a main route for growth, as our findings illustrate. By contrast, very few diversification moves were driven by slow growth of the firms existing activities. The regional analysis, however, shows large differences between regions in the importance assigned to this objective, differences that seem related to the growth rates of the economies concerned. Thus, in contrast to the objectives of firms in other regions, the decline of the present activity is the main drive behind the diversification of Asian and Middle East firms. Indeed, most countries in these regions have been growing slowly over the last decades. Particularly notable in this context are Middle Eastern firms, most of them are heavily engaged in oil and in oil related activities that have been stagnating during large parts of the last two decades.
Fig. 1. Firms perception of diversification.
124
Diversification to even out cyclical effects of a single industry is regarded by the firms as very important (this motive was driving 12 and 25% of all diversification moves, as first and second objectives, respectively). This reflects the unstable and risky economies of many developing countries, a factor discussed above as one of the reasons for the extent and nature of the diversification of developing country firms. Such an objective is particularly common among firms diversifying from commodities, due to sharp cyclical trends typical to these sectors. This objective is most likely to drive diversification into unrelated areas, as expressed for example by a mining company that acquired interests in the Mexican railroad, after it was privatised, . . . to protect ourselves from . . . the cyclical prices of metals (questionnaire). The firm (which did not agree to disclose its name) reported that it searched purposefully for an entirely unrelated field as a target for its diversification to avoid the risk of being focused on commodities. Competitive pressures provide only a moderate drive for the diversification moves of the firms surveyed, a finding that reflects the relative low competitive pressures typical to many developing countries (a situation that is changing rapidly in many countries with the liberalisation and opening up to foreign competition). A main reason for this competitive situation is the activities of the diversified firms themselves. These firms exercise a degree of market power that exceeds by far their counterparts in the developed countries, and the industries they control are characterised by tight oligopolistic structures and high concentration. For example, in 1997, more than 80% of South Koreas GDP was generated by 30 chaebols (Newsweek, 1997). As much as one third of manufacturing output in most Latin American countries is under the control of some two dozen large domestic conglomerates (Benavente, 1996). The largest 100 Mexican firms in the 1980s accounted for approximately 50% of the countrys GDP and owned more than 70% of its private capital (Amsden and Hikino, 1994).
Fig. 2. Objectives of diversification of incorporated firms.
125
At the end of the 1980s, the top 20 Indian groups accounted for approximately two thirds of total private sector industrial assets (Ghemawat and Khanna, 1998). A similar concentration is typical to most developing countries and it abolishes competitive pressures, which subsequently have limited impact on the diversification of firms, as our findings show. The relatively small number of diversification moves driven by the intention to benefit from complementarity between various activities and to utilise knowledge gained elsewhere in a new activity reflect the tendency of developing country firms to diversify widely into unrelated areas (discussed in some length above). However, there are considerable differences across regions in this respect, with the diversification moves of Middle East firms driven by this objective far more than firms of other regions. This pattern reflects the tendency of Middle East oil firms to diversify into oil-related industries, in which their previous knowledge is often of considerable value. Very few diversification moves were driven by the intention to extend the scope of the firm within its existing product line, by forward vertical integration. These findings highlight the low value assigned by developing country firms to proximity to customers, via marketing and distribution, and show how limited impact, if at all, such considerations exercise over
Table 2 Objectives of diversification (shares of all diversification moves1 ) By region2 Whole sample Objectives To a new activity because the present one is on the decline To a new activity to grow beyond existing size To even out cyclical effects of a single industry To follow similar moves by major competitors To acquire strong market position in a new market before main competitors To benefit from complementarity between two or more activities Rational follow-up to previous diversifications (e.g., utilise knowledge gained) To get closer to final consumers To control the distribution of the intermediate and/or final products Total
1 2
1st obj. 0.05 0.37 0.12 0.01
2nd obj. 0.02 0.20 0.25 0.08
3rd obj. Asia 0.03 0.08 0.11 0.15 0.37 0.00 0.07 0.00
Middle Southeast Latin East Asia America Africa 0.42 0.25 0.00 0.00 0.02 0.34 0.14 0.02 0.03 0.32 0.15 0.03 0.04 0.54 0.11 0.00
0.14 0.18
0.15 0.11
0.12 0.16
0.30 0.03
0.00 0.33
0.10 0.22
0.26 0.20
0.04 0.12
0.08 0.02
0.07 0.11
0.05 0.15
0.18 0.00
0.00 0.00
0.08 0.07
0.00 0.00
0.11 0.00
0.00 1.00
0.00 1.00
0.12 1.00
0.03 1.00
0.00 1.00
0.00 1.00
0.00 1.00
0.00 1.00
Totals may not add up due to rounding errors. Only the first objective reported for each diversification move. Differences across the regions are not significant in one-way analysis of variance (ANOVA).
126
their expansion. The economic reality faced by developing country firms in the past encouraged this approach as it gave little incentives to develop branding and marketing. A deeply unequal income distribution (notably in Latin America but also elsewhere in the developing world) inhibited the development of consumer markets, and the heavy control of the government on the economies often meant that proximity to government officials was far more important than proximity to customers. While many of the causes for this reality have changed in most developing countries, their firms still tend to neglect these aspects of their business activity (see also ahead). Furthermore, developing country firms have traditionally not been active in the consumer goods industries, and when they export their output, they seldom sell directly to the final consumers, where such skills are in highest need. 4.2. The acquisition of new skills for the diversification The analysis in Table 3 suggests that there are fundamental differences among the firms surveyed in terms of their approach to the acquisition of the various skills needed for their expansion. Technological skills, and to a lesser extent managerial skills, were acquired for the majority of the diversification moves, whereas marketing skills were acquired for a far smaller portion of such moves. Also the mode of acquisition of these skills vary considerably. The most important mode to acquire managerial and marketing skills (to the extent that the latter are acquired) is via internal development, while technological skills are most likely to be acquired externally. As discussed above, developing country firms usually lack a proprietary technology, and have tended to borrow technology that has already been commercialised by firms from other countries. For example, no industry was established in South Korea even in the early 1990s for which foreign technology was unavailable (Amsden and Hikino, 1994). R&D as a formal activity has been undertaken by relatively few developing country firms, and to the extent that such activities exist, they have taken the form of adoptive activities that in most cases would not fall under an internationally accepted definition of R&D activities. In 1996, high tech stocks accounted for only 0.5% of stock market capitalisation in Southeast Asia, compared with 5% in Japan and 9% in the US (The Economist, 1996a). Our findings support the tendency of developing country firms to acquire technology externally rather than to develop it internally. The main routes for the acquisition of technology are agreements with foreign firms or the acquisition of external resources, a pattern that is well established by previous
Table 3 Acquisition of new skills for the diversification (shares of all diversification moves) Acquisition mode Skills Technology Management Marketing
1
Acquisition1 0.853 0.705 0.176
Internal development 0.137 0.833 0.666
Via foreign partnership 0.310 0.166 0.333
Hire/purchase external resources 0.551 0.000 0.000
Shares of diversification moves in which new skills were acquired.
127
research (see for example, Dahlman and Frischtak, 1993; Hou and Gee, 1993; Katz and Bercovich, 1993; Jegathesan, 1997; Ungson et al., 1997; Vonurtas and Safioleas, 1997). By contrast, when it comes to managerial and marketing skills, the firms surveyed rely heavily on internal resources. A Pakistani firm that did not agree to release its name reported a clear policy according to which . . . wherever possible, internal [managerial] skills were used. Only when they were lackingexternal skills were secured (questionnaire). Other responses suggest that firms tend to believe that they have less need to acquire managerial skills and a better ability to develop them internally. A textile Hong Kong firm reported that . . . with all diversifications undertaken by the company, the core management team . . . has had the required skills and expertise . . . such that it was capable to make any prompt adjustment necessary . . . and to monitor effectively the day-to-day business (questionnaire). This attitude towards managerial skills is, to a certain extent at least, an outcome of the tendency of developing country firms to be managed by family members, who often regard the acquisition of specific managerial skills as unnecessary. 4.3. The finance of the diversification The firms surveyed finance the majority of their diversification moves by internal sources of finance (Table 4), a pattern that reflects the lack of appropriate domestic sources of external finance and difficulties in accessing foreign sources. There is, however, considerable regional variation in terms of the patterns of finance. Latin American firms rely mainly on internal sources of finance, a result of relatively undeveloped external sources. By contrast, Middle East firms have access to a more developed financial system both at home, due to a well-developed banking system (notably in some of the Gulf countries), and in the neighbouring countries. Indeed, they rely on internal sources of finance less than their counterparts in other regions. The heavy reliance of Southeast Asian firms on external sources was reported also by other studies (Singh, 1995, 1996) and is attributed to the fast growth of these firms, whereas their investment demand has far outstripped their internal resources. In addition, more than elsewhere in the developing world, firms in this region have enjoyed preferential access to external sources of finance, made attractive by government subsidies. To the extent that the firms surveyed use external resources, they rely mainly on those available in their home country. Under such circumstances, the availability of the latter is vital for their ability to expand and was indeed cited as a major obstacle for the growth of firms in the poorer developing countries (UNCTAD, 1993). Middle East firms are the exception in this respect. They are better able to finance their diversification by capital raised abroad due to strong financial ties between the countries in this region (notably the Gulf countries, to which most Middle East firms in our sample belong), facilitated by various regional agreements. These ties and agreements give firms favourable access to capital outside their home country, notably in some of the well-developed stock markets in the region (such as those in Bahrain, Amman) (Azzam, 1988; Wilson, 1994). With the exception of African firms (most of them are South African), the firms surveyed display a preference for debt over equity capital, both in domestic markets and abroad. At home this preference reflects the levels of development of the stock markets and the banking systems. In spite of considerable progress achieved lately, in many developing countries the
128
Table 4 Sources of finance for diversification, by region and over time1 By region Financial source Internal funds Equity capital raised in the home country Loan capital raised in the home country Equity capital raised abroad Loan capital raised abroad Government support Concessional finance from international or regional organisations Total3
1
By diversification age2
Middle Southeast Latin 05 610 1120 20 Asia East Asia America Africa years years years years 0.43 0.11 0.23 0.06 0.12 0.04 0.21 0.07 0.25 0.21 0.25 0.00 0.37 0.12 0.32 0.04 0.14 0.00 0.00 1.00 0.56 0.16 0.19 0.02 0.04 0.02 0.00 1.00 0.50 0.26 0.20 0.03 0.00 0.00 0.00 1.00 0.35 0.08 0.29 0.09 0.17 0.02 0.47 0.16 0.20 0.05 0.09 0.02 0.55 0.15 0.15 0.07 0.07 0.00 0.56 0.18 0.25 0.00 0.00 0.00 0.00 1.00
0.00 0.00 1.00 1.00
0.00 0.00 0.00 1.00 1.00 1.00
Shares of all diversification moves in each region/age group that were financed by a particular source (finance of 25% or more of the total funds needed for the diversification). 2 Years since implementation, measured from 1997. 3 Totals may not add up due to rounding errors. Differences are significant at 0.1 across regions and are not significant over time. All test of significance were conducted adding firm size as a control variable.
stock markets remain small in relation to the size of the economies (The Economist, 1997b), providing only limited source of finance. This explains why Latin American firms finance a relatively small share of their diversification moves by finance raised on the stock markets. By contrast, South African firms use the more developed stock market in their country as a major source to finance their expansion. The patterns of fund raising have changed considerably over time. The relative importance of internal finance has diminished consistently (most notably during the last decade) and several external sources of finance have taken its place. Notably there has been a considerable increase in raising capital abroad. While foreign sources were not in use until the last decade, 17 and 9% of diversification moves undertaken during the last five years were financed by these sourcesin the form of debt and equity, respectively. A major reason for these changes is the liberalisation of regulations related to capital raising at home and abroad. Financial markets were a main target of the interventionist policies of many developing country governments. Severe regulations of Latin American countries over their financial markets have inhibited the development of the capital markets. In most East Asian countries (with the notable exception of Hong Kong) governments have intervened extensively during the past three decades, treating financial institutions as tools of their industrial policy (see for example, Lee, 1992; Koike, 1993; Glen and Pinto, 1995). Furthermore, in many countries firms could not borrow money from foreign banks without a special permission from the government, which thus controlled the allocation of both domestic and foreign capital. The liberalisation of these rules (which is taking place in most developing countries albeit progressing at different tempos) has changed the options available for firms and their subsequent use of various sources to finance their expansion, as our findings show.
129
4.4. The implementation of the diversification Firms can diversify through mergers and/or acquisition or through internal growth, that is, the internal development of new business areas. The factors that affect their choice between these profoundly different expansion modes are both external and internal to firms. The former includes forces such as signals and incentives from the capital markets (Markides, 1995) or changes in competition laws and antitrust regulation. The latter relate to firms attitudes towards risk and their expectations regarding the tempo and nature of their growth. The firms included in our survey display a strong preference for internal development (Table 5). Diversification via establishment of a new subsidiary or extension of an existing one are by far the most common modalities used by the firms surveyed to enter into new areas of activity. Additional support for this pattern is provided also by other studies. Forty-five and twenty percent of the cases of expansion of South Korea chaebols in the first half of the 1980s involved acquiring stocks and establishing new firms, respectively. Merging and acquiring management participation and business rights accounted for only 35% of all cases (Amsden, 1989). To a certain extent, the preference of developing country firms for organic growth is a result of financial constraints rather than a strategic choice, and it is related to lack of financial resources to acquire other firms, particularly foreign firms. In most developed countries (notably the U.S.), the well-developed stock markets provide a main source to finance growth by acquisitions. Similar sources are not available for firms in most developing countries, which leaves them with the option of internal growth as the main one. To the extent that the firms surveyed implemented their diversification moves by acquisition of other firms, they display a preference for firms in their own countries. Several firms explained this tendency by difficulties to merge with foreign firms with considerably different cultures and values. Pervez, Argentina suggests an example: . . . . the cultural change needed to adjust the values of new organisations to our own corporate philosophy, . . . the confidence factor and the achievement of a culture which surpasses the mere adding of parts has been one of the biggest obstacles [for the acquisition of foreign firms] (questionnaire). Another major reason cited is the high cost of foreign firms. By contrast, most of the joint venture agreements are with foreign firms. The preference of the firms surveyed for green-field establishment as the main modality to enter into new areas has diminished considerably during the last decades. While more than half of the diversification moves undertaken 20 years ago or more were implemented via the establishment of new subsidiaries, this modality accounts for only 23% of diversification moves implemented in the 1990s. The largest increase during this period was in joint ventures with foreign firms, which did not exist two decades ago and became a major way to diversify in the 1990s. These nonequity agreements have become a wide spreading mechanism among developing country firms to get access to technology and markets (Vonurtas and Safioleas, 1997). 4.5. The impact of government policies on the diversification Governments have a whole array of policies that can affect the diversification behaviour of firms, ranging from firms preference for product diversification over other routes to
130
Table 5 Modalities to implement diversification moves, total and over time (number of diversification moves and shares of all moves for an age group) Diversification age1 (shares) Modalities Establishment of new subsidiary to handle the new area of activity Extension of existing subsidiary or department to deal also with the new activities Acquisition of existing domestic firm to add to your company to handle the new activity Acquisition of existing foreign firm to add to your company to handle the new activity Joint venture with a domestic firm already active in the new area/industry Joint venture with a foreign firm already active in the new area/industry Nonequity agreement with a domestic firm already active in the new area/industry Nonequity agreement with a foreign firm already active in the new area/industry Total2
1 2
Diversifications (n) 47 32 27 20 3 25 1 1 156
up to 5 years 0.23 0.24 0.18 0.12 0.04 0.18 0.00 0.00 1.00
610 years 0.20 0.31 0.12 0.07 0.03 0.23 0.00 0.03 1.00
1120 years 0.22 0.22 0.44 0.00 0.00 0.11 0.00 0.00 1.00
20 years 0.54 0.18 0.09 0.09 0.09 0.00 0.00 0.00 1.00
Years since implementation, measured from 1997. Total does not add up to the total number of diversification moves reported due to missing observations. Total shares may not add up due to rounding errors. Differences are not significant in one-way analysis of variance (ANOVA).
growth (e.g., geographical diversification) to firms selection of one type of diversification over others (such as vertical vs. horizontal diversification). Governments can also affect the direction of diversification, by targeting specific industries. Previous research on the diversification experience of developing countries suggests that diversification is unlikely to succeed if certain macroeconomic indicators are not in place. This has been illustrated by studies of the international organisations on this topic (see for example, UNCTAD, 1994, 1995a, 1995b, 1997; World Bank, 1990. These studies have sought to illustrate that the activities of governments in areas such as infrastructure, access to raw material, feasibility of marketing certain products, availability of financial resources are important determinants of the capacity of firms to diversify. Many developing country governments, however, notably those of some Asian and Latin American countries, have played a much more active and direct role in affecting the nature and direction of the diversification of their firms. These governments have actively encouraged the development of selected firms operating in many unrelated areas, by providing them with favoured conditions, such as cheap capital, access to foreign currency to import scarce materials, subsidised interest rates, tax exemptions, and preferential contracts for government projects. In most Asian and Latin American countries, the larger diversified firms have close relationships with those in power
131
(Amsden, 1991, 1998; Koike, 1993; Ungson et al., 1997). Some have gone as far as to argue that diversified firms in these countries have emerged mainly because of political connections (Jones and Sakong, 1980). Nonetheless, the analyses in Tables 6 illustrate that the majority of the firms surveyed consider the policies of their governments to have no impact on their diversification activities, although there is a considerable variation among various policy tools, with some regarded to be more influential then others. In light of the discussion so far, this is a most surprising finding. Several explanations, related to the characteristics of the firms surveyed, might be suggested for this finding. First, the support of governments has been confined to selected firms that were encouraged to diversify and grow large, but the majority of firms were not as privileged and have diversified without such support. Second, it might be that our sample does not represent firms from the countries whose governments pursued the most interventionist policies (for example, there are no South Korean firms in the sample). However, these explanations are partial at best, and if these findings can be verified on a larger sample, they signify a considerable challenge to the common view regarding the impact of developing country governments on the expansion of their firms. African firms stand out as those that consider the policies of their governments to have most impact on their diversification activities, but there is considerable variance among various policies. By contrast, Latin American firms regard government policies as having the smallest impact on their expansion. Furthermore, firms in this region, far more than firms in any other region, expressed the view that government policies are the most critical obstacle for the implementation of their diversification plans. An Argentinean petroleum and gas company that did not agree to disclose its identity wrote: . . . the most serious problems associated with the different diversifications were the constant political interference on the regulation and law framework. . . . this implies a high uncertainty which makes our investment highly risky (questionnaire). Compania de Minas Buenaventura, Peru expressed a similar view: . . . political uncertaintylack of stable and rational rules of the game (e.g., inflation running at 7,000% a year in 1990)was most disturbing. . . . political, social, and economic scenarios must be stable and stimulating to promote investment (questionnaire). Firms views of the impact of government policies on their diversification activities have changed considerably over time. Certain policies were regarded as lacking any impact (or did not exist) two decades ago, and have become considerably more influential since then. This category includes policies such as import-related incentives, technology incentives, assistance in identifying opportunities for diversification, and providing training for employees. Other policies, such as export and fiscal incentives, have become less influential over time. These developments are likely to reflect actual changes in the approach of many developing country governments towards the expansion of their firms and the subsequent tools used to facilitate or inhibit particular directions of growth. Developing country governments have realised that their firms need to acquire certain skills (notably technology) and to upgrade the capabilities of their labour to grow and diversity, and consequently they have increasingly provided assistance in the acquisition of these skills. Furthermore, the governments of most developing countries have changed considerably their approach towards trade policy over the last two decades and have modified their policies accordingly. The changes in the perception of firms regarding the impact of particular policies over time reflect these developments.
132
Table 6 The influence of government policies on firms diversification activities, by region and over time By region Government policies Financial incentives in money Financial incentives in kind Export-related incentives Import-related incentives Fiscal incentives Technology incentives Assistance in identifying opportunities for diversification Facilities providing training for employees By diversification age1 Middle Southeast Latin Up to 5 610 1120 20 Asia East Asia America Africa years years years years 0.80 0.77 0.85 0.73 0.71 0.81 0.80 1.00 0.63 0.50 0.77 1.00 .092 0.75 1.00 0.61 0.66 1.00 0.84 1.00 0.85 1.00 1.00 0.81 0.94 1.00 1.00 1.00 0.60 1.00 0.66 1.00 0.38 1.00 0.27 0.83 0.90 0.92 0.78 0.68 0.74 0.88 0.90 0.73 0.77 0.85 1.00 0.71 0.84 1.00 0.50 1.00 1.00 0.80 0.80 1.00 0.85 1.00 0.50 1.00 0.50 1.00 1.00 1.00
0.86 1.00 0.56 1.00
0.92 1.00 1.00 1.00
Shares of all diversification moves in each cell in which firms perceive the policies of their governments as lacking any influence. The impact of government policies were ranked on a scale as follows: 1, highly influential; 2, of moderate influence; 3, of no influence/does not exist. This is the response reported in the table above, expressed as share of total responses for each cell. Differences are significant at the 0.05 and 0.1 levels across regions and over time, respectively. 1 Years since implementation, measured from 1997.
4.6. The sale of the output of the diversification Domestic markets are by far the main markets in which the firms surveyed sell the output of their diversification (Table 7). This implies that their diversification activities are undertaken primarily in response to demand in their home countries, with only limited attention to opportunities elsewhere. Asian firms rely more heavily on their domestic markets, while African as well as Southeast Asian firms sell smaller parts of the output of their diversification domestically. These differences are related to the size of domestic markets (firms based in large home markets engage in international activity to a lesser extent than their counterparts in smaller countries, regardless of their level of economic development) and to the ability of firms to compete successfully outside their home country. This ability is often related to policies pursued by the governments of various developing countries, which encouraged the development of more inward or outward looking firms. The overwhelming focus on the domestic market has diminished considerably over the last two decades. Ninety percent of the output of diversification activities implemented 20 years ago or more were sold domestically, while this share dropped to approximately 60% in the last decade. Sales abroad have increased substantially during this period. This change reflects the improvement of the international competitiveness of developing country firms. One of the most severe consequences of the protectionist policies pursued by many developing country governments (notably in the 1960s and 1970s, with some particularly slow to liberalise them in the coming decades) was that they prevented firms from competing internationally and abolished foreign competition at home. Unable to compete internationally,
L. Nachum/Journal of International Management 5 (1999) 115140 Table 7 Markets in which firms sell the output of their diversification, by region and by industry By region Markets Domestic market Foreign market via affiliate2 Export to developing countries3 Export to developed countries Total4 By diversification age1
133
Middle Southeast Latin Up to 5 610 1120 20 Asia East Asia American Africa years years years years 0.78 0.07 0.08 0.07 1.00 0.65 0.15 0.20 0.00 1.00 0.60 0.33 0.03 0.03 1.00 0.67 0.05 0.20 0.07 1.00 0.48 0.08 0.26 0.17 1.00 0.66 0.08 0.17 0.08 1.00 0.57 0.16 0.16 0.11 1.00 0.77 0.07 0.15 0.15 1.00 0.90 0.00 0.10 0.00 1.00
Shares of all diversification moves in each region/industry which their output was sold in a particular market (25% or more of total output). Differences are significant at the 0.1 level across regions and are not significant over time. 1 Years since implementation, measured from 1997. 2 Includes branch(s), subsidiary(ies), or joint venture(s) established in a foreign market. 3 All countries except Japan, Western European, and North American countries, which form the group of developed countries. 4 Totals may not add up due to rounding errors.
firms expansion was confined to the opportunities provided by the domestic markets, as our findings demonstrate. This situation was particularly typical in Latin America (see Fleury [1995] for description of the Brazilian economy) and in several Asi with the ability to utilize bundling strategies in the mature phase of the life cycle; 6. Longer life cycles removes price as the primary driver in a companys marketing strategy enabling it to incorporate more value-added elements in its marketing and product strategies; 7. Longer life cycles tend to enable a firm to develop more customer focused service strategies; and 8. Longer life cycles enable a firm to develop more cash cow opportunities for itself by being able to recoup all of its research and devcreasingly important for them, as our findings demonstrate. The well-known preference of developing country firms for export over FDI as the main modality to serve foreign markets is supported by our findings (with the exception of Southeast Asian firms). Developing country firms exhibit such preference because exports are less risky and require less familiarity with foreign markets compared with FDI. The more internationally matured and experienced Southeast Asian firms are able to move parts of their production overseas and serve foreign markets also through local production facilities (see UNCTAD-DTCI [1997] for a detailed description of this process). When exporting, the firms surveyed display a preference for developing over developed country markets. Such preference is particularly notable in regions in which there are strong regional ties, such as the Middle East and Latin America, and regional trade agreements facilitate exports to the neighbouring countries5.
The findings do not reflect the heavy reliance of some firms in Latin America, notably Mexican firms, on the U.S. market for their export, because firms from these countries are under-represented in the sample.
134
5. Discussion The findings of the survey and the discussion that followed point at several directions in which specific characteristics of countries/regions affect the intensity and nature of the diversification activities of firms. To test more systematically these hypothesised links, we use the contextual analysis procedure (Cheng, 1994), which establishes a causal link between firms characteristics and specific attributes of their environment. The assumption underlying this procedure is that the societal context in which firms operate is a potential source of variation among them. This procedure thus relates firms attributes as the dependent variable to characteristics of societal context, such as those pertaining to a countrys economic, legal, and political structures, as predictors. These relationships are tested using cross-national settings. The discussion thus far suggests several societal characteristics as the most influential on the diversification activities of firms. These characteristics, the hypothesised impact on diversification and their operation measures are presented in Table 8. We add two firm-level predictors: revenues and profitability (earning per share), that vary across firms. The dependent variable is the diversification intensity of individual firms, measured by the share of the main source of revenues in total revenues6. The results of a regression analysis estimating this model are presented in Table 8. The findings of the analysis confirm most of our hypotheses regarding the impact of individual characteristics on the diversification of firms, and overall, the model has strong explanatory power for the variance in diversification intensity among them. With the exception of capital market structure, all other societal characteristics are highly significant and relate to the dependent variable as hypothesised. This implies that the environment in which firms operate influence the intensity of their diversification activities. Recently, there has been a growing interest in this topic, and there are few studies that emphasise this link (notably Khanna and Palepu, 1997, 1998; Ghemawat and Khanna, 1998). These studies have sought to illustrate by way of several case studies conducted in India and Chile the impact of the characteristics of developing countries on the diversification of firms. In particular they have emphasised the institutional framework as a major country factor. Our study adds to this literature by extending the scope of the country characteristics examined and by testing more systematically for their impact. In contrast to the opinion expressed by the firms surveyed, government incentives were found to relate significantly and positively to the diversification intensity of firms. This finding is in line with arguments stressed by previous research regarding the critical role played by developing country governments in this process (see Amsden, 1991, 1998; Koike, 1993; Ungson et al., 1997; Ghemawat and Khanna, 1998). These studies have shown, mostly by way of case studies and descriptive analyses, how governments affect, both directly and indirectly, the diversification propensity of their firms. The findings of the regression analysis provide a more solid confirmation for this opinion.
In the statistical analysis, the dependent variable is expressed as 1 the share of the largest business, to create a measure that gets higher values the more diversified is the firm.
6
L. Nachum/Journal of International Management 5 (1999) 115140 Table 8 The link between country characteristics and diversification intensity (hypotheses, operation measures and regression statistics) Predictors: Societal characteristics Domestic market size Hypothesised impact on diversification activity The small size of many developing countries limits the growth potential within a firms own industry and facilitates diversification into other industries as a way to grow The specific structure of capital markets create constraints on diversification and a tendency for internal finance
135
Operation measure(s)1 GDP, Billion $
Regression statistics (t-values) 0.00199 (2.45)*
Capital market structure
Risk and uncertainty
Technological capabilities
Diversification has often been undertaken to avoid the risk of relying on a single activity or industry in economies subject to high instability Limited technological capabilities derive firms to diversify as a way to gain competitive edge Developing country governments have encouraged the diversification of firms in both direct and indirect ways Control variables
Domestic credit provided by the banking sector, % of GDP (number of listed domestic companies) Composite ICRG risk rating2
0.00130 (1.50)**
0.01867 (5.51)*
Government incentives
Firm-level characteristics General statistics
High tech export, % of total exports; number of patent applications filed by residents Subsidies and other current transfer, as % of total government expenditure Revenues (earning per share)
***
0.0222 (3.22)*
0.0000 (1.01) n 44 Adj. R square: 0.689 Sig. F 0.000
1 Regional averages were calculated for each variable. Share data were broken into the raw data to calculate their averages. For example, the average for high tech export as percentage of total export was calculated as the ratio between the averages of high tech export and total exports. The data is for 1997. In parentheses, variables excluded from the final model because they did not yield good statistics results. Intercept was removed as it diminished the overall explanatory power of the model as well as of individual variables. 2 The composite ICRG risk rating is an overall index calculated by the International Country Risk Guide (ICRG). This index is based on 22 indicators of risk, grouped together into three major categories: political, financial, and economic indicators, and ranges from 0 to 100. The lower the rating, the more risky is the country concerned. *p-values 0.0. **p-value 0.14. ***Both variables were removed from the regression due to high correlation with the other predictors. Source of societal data: World Bank (1999).
The low level of significance of capital market structure implies that the latter is a less important determinant of the intensity of diversification. These findings are in line with the findings of the survey regarding the mixed approaches to finance and the wide variation in this respect across regions and countries. Such variation relates to the level of development
136
of domestic finance options, to regulations related to finance raising domestically and abroad. Consequently, the structure of domestic capital markets affect differently firms in different regions, a situation that is reflected in the findings of the regression. Previous research has paid limited, if any, attention to the effect of market size on the diversification of firms. The argument here is that when firms operate only or mainly domestically, smaller domestic markets facilitate diversification, as they restrict growth options within a single industry. Our findings provide strong support for this link. They also confirm the strong and negative impact of risk and uncertainty on the diversification of firms.
6. Concluding remarks This study sought to examine the strategic behaviour of developing country firms that have diversified from commodities and to identify the salient patterns of their behaviour. It was based on responses of 44 developing country firms to a mailed questionnaire in which they reported on their experience in 163 diversification moves. The various analyses conducted in the article highlight the variety of objectives that drive the expansion of these firms, as well as the strategies and modalities undertaken to implement them. To a large extent, this variety could be attributed to specific characteristics of regions, such as the size of domestic markets, the existence of regional economic ties, the development of the financial system, which influence the particular characteristics of the diversification activities of firms. Notable among these is the role played by governments in different regions. This role is becoming more apparent in the longitudinal analyses, which illustrate considerable changes in the diversification activities of the firms studied over time, many of them are influenced by changes in government policies, particularly those related to the liberalisation of markets and the financial systems. Indeed, a regression analysis conducted to test these links more systematically has shown that the societal environment in which firms operate exercise strong impact on their diversification activities. Most societal characteristics were found to be highly significant, and they explain a large portion of the variance in the intensity of diversification among the firms included in the survey. It remains for future research to explore further the behaviour of developing country diversified firms, to reach a better understanding of the reasons for their existence, and why they have evolved into such a critical factor in late industrialising countries. Large diversified firms were shown to play a dominant role in the industrialisation of developed countries (Chandler, 1990). Do they have the potential to play a role just as vital in the economic development of the developing countries, and what, if anything, governments should do to facilitate such developments? Why is it that firms based in countries at similar levels of development diversify in a considerably different manner, and which of these different routes is more desirable for their home country? A better understanding of these issues will hopefully allow progress in the development of a theory of diversification of developing country firms, as part of a more general theory of the strategic behaviour of these firms. The recent financial crises in Asia seem to suggest a great need for a better understanding of such issues. Another task left for future research is to examine the diversification behaviour of developing country firms that have originated from industries other than commodities. While this
137
is the most common route for diversification in most developing countries, it is by no means the only one. For example, several of South Koreas largest chaebols have diversified from service activities (Ungson et al., 1997). The experience of firms diversifying from and within manufacturing and services might be different from the experience of firms diversifying from commodities. The latter may exhibit greater tendency for forward vertical diversification to control the distribution, while they are unlikely to diversify vertically backward. They are also more likely, particularly nowadays, to diversify away from commodities and into areas unrelated to their core activity, to even out cyclical trends typical to this sector. Such differences may affect the configuration of the country attributes that influence the diversification of firms and require additional research that will address them. Finally, the small size of the sample limits the validity of the findings, which should therefore be taken as no more than an indication for order of magnitude and directions of trends, rather than a solid proof of reality. We have chosen deliberately to cover firms from all developing countries. This choice allowed us to detect differences among them, but often at the inevitable cost of the depth of the analysis for individual regions and countries. It is our modest hope that the lessons that emerged from this study provide a justification for this approach. Acknowledgments This article is derived from a research originally prepared for the Division of International Trade in Goods, Services and Commodities of UNCTAD. UNCTADs sponsorship of the original research is highly acknowledged. I wish to thank Drs. Sue Tang and Mehmet Arda, UNCTAD, for useful comments on earlier drafts. I would also like to acknowledge most constructive and illuminating comments of an anonymous referee. References
Amsden, A., 1989. Asias next giant: South Korea and late industrialisation. Oxford University Press, New York and Oxford. Amsden, A., 1991. Big business and urban congestion in Taiwan: the origins of small enterprise and regionally decentralised industry. World Dev 19 (9), 11211135. Amsden, A., 1998. South Korea: enterprising groups and entrepreneurial government. In: Chandler, A.C., Amatori F., Hikino T. (Eds.), Big business and the wealth of nations. Cambridge University Press, Cambridge. Amsden, A., and Hikino, T., 1994. Project execution capability, organisational know-how and conglomerate corporate growth in late industrialisation. Industrial and Corporate Change 3, 111147. Argyres, N., 1996. Capabilities, technological diversification and divisionalisation. Strat Manage J 17, 395410. Aw, B.Y., Roberts, M.J., Chen, X., 1997. Firm-level evidence on productivity differentials, turnover and exports in Taiwanese manufacturing NBER Working Paper No. 6235. Azzam, H.T., 1988. The golf economies in transition. St. Martins Press, New York. Batra, G., Aw, B.Y., 1998. Firm size and the patterns of diversification. Int J Ind Organ 16, 313331. Benavente, J.M., 1996. New problems and opportunities for industrial development in Latin America UNCTAD/ ITE/EDS/Misc.2, CEPAL, Santiago de Chile. Berger, G.P., Ofek, E., 1995. Diversification effect on firm value. J Financial Econ 37, 3965. Business Week, 1998. Want a nice piece of a chaebol? May 18, 2829. Business Week, 1998a. The Taiwan touch. May 25, 2226.
138
Chandler, A.D., 1977. The visible hand: the managerial revolution in American business. Harvard University Press, Cambridge, MA. Chandler, A.D., 1990. Scale and scope, the dynamics of industrial capitalism. Harvard University Press, Cambridge, MA. Chang, S.J., Choi, U., 1988. Strategy, structure and performance of Korean business groups: a transactions cost approach. J Ind Econ XXXVII (2), 141158. Channon, D.F., 1973. The strategy and structure of British enterprise. Harvard University Press, Cambridge, MA. Chen, R., 1996. Technological expansion: the interaction between diversification strategy and organisational capability. J Manage Stud 33 (5), 649666. Cheng, J.C.L., 1994. On the concept of universal knowledge in organisational science: implications for cross-national research. Manage Sci 40 (1), 162168. Cho, D.S., Park, K.S., 1998. The interactive effects of diversification strategy and entry mode on economic performance: empirical analysis of 30 major chaebol groups in Korea. A paper presented in the AIB annual conference, Vienna, October. Dahlman, C.J., Frischtak, C.R., 1993. National systems supporting technical advance in industry: the Brazilian experience. In: Nelson, R.R. (Ed.), National innovation system: a comparative analysis. Oxford University Press, New York and Oxford. Danis, D., Danis, D., Sarin A., 1997. Agency problems, equity ownership and corporate diversification. J Finance March, 135160. Dixon, D.H., 1994. Inefficient diversification in multi-market oligopoly with diseconomies of scope. Economica 61, 213219. Dyas, G.P., Thanheiser, T.H., 1976. The emerging European enterprise: strategy and structure in French and German industry. The MacMillan Press, London and Basingstoke. The Economist, 1996a. South Korea conglomerates. May 18th, 66The MacMillan Press.67. The Economist, 1997a. Conglomerates on trial. April 5, 73. The Economist, 1997b. A survey of business in Latin America. December 6, Survey. The Economist, 1997c. South Korean conglomerates December 13, 7980. The Economist, 1997d. China adopts the chaebol. June 7, 7374. The Economist, 1997e. China and the chaebol. December 20, 119120. The Economist, 1997f. Indian industry: a cow in tigers clothing. June 28, 8586. The Economist, 1998. A survey of East Asian economies. March 7, survey. The Economist, 1998a. The flexible tiger. January 3, 73. Fleury, A., 1995. Quality and productivity in the competitive strategies of Brazilian industrial enterprises. World Dev 23 (1), 7385. Fowler, J.F., 1988. Survey research methods. Sage Publications, London and New Delhi. Gereffi, G., 1990. Big business and the state: East Asia and Latin America compared Asian Perspective. 14 (1), 529. Ghemawat, P., Khanna, T., 1998. The nature of diversified business groups: a research design and two case studies. J Ind Econ XLVI (1), 3561. Glen, J., Pinto, B., 1995. Capital markets and developing countries firms. Finance Dev March, 4043. Hattori, T., 1984. The relationship between Zaibatsu and family structure: the Korean case. In: Okochi, A., Yasuoka, S. (Eds.), Family business in the era of industrial growth. University of Tokyo Press, Tokyo. pp. 87116. Hou, C.M., Gee, S., 1993. National systems supporting technical advance in industry: the case of Taiwan. In: Nelson, R.R. (Ed.), National innovation system: a comparative analysis. Oxford University Press, New York and Oxford, pp. 5875. Ito, S., 1984. Ownership and management of Indian zaibatsu. In: Okochi, A., Yasuoka, S. (Eds.), Family business in the era of industrial growth. University of Tokyo Press, Tokyo, pp. 1532. Jegathesan, J., 1997. Technology development and transfer: experience form Malaysia. Int J Technol Manage 13 (2), 196214. Jones, L.P., Sakong, Il, 1980. Government, business and entrepreneurship in economic development: the Korean case. Council on East Asian Studies, Harvard University, Cambridge, MA. Katz, J.M., Bercovich, N.A., 1993. National system of innovation supporting technical advance in industry: the
139
case of Argentina. In: Nelson, R.R. (Ed.), National innovation system: a comparative analysis. Oxford University Press, New York and Oxford, pp. 97111. Khanna, T., Palepu, K., 1997. Why focused strategies may be wrong for emerging markets. Harvard Business Rev July/August, 4151. Khanna, T., Palepu, K., 1998. Policy shocks, market intermediaries, and corporate strategy: the evolution of business groups in Chile and India. Harvard Business School, Working Paper 98-100. Koike, K., 1993. Introduction. Dev Econ XXXI (4), 363377 Lee, C.H., 1992. The government, financial system and large private enterprises in the economic development of South Korea. World Dev 20 (2), 187197. Leff, H.N., 1978. Industrial organisation and entrepreneurship in the developing countries: the economic groups. Econ Dev Cult Change 4, 661675. Leff, H.N., 1979. Entrepreneurship and economic development: the problem revisited. J Econ Lit xxvi, 4664. Lim, G.E., Teck, T.Y., 1995. Diversification strategies, firm characteristics and performance among Singapore firms. Int J Manage 12 (2), 223233. Markides, C.C., 1995. Diversification, restructuring and economic performance. Strat Manage J 16, 101118. Markides, C.C., Williamson P.J., 1996. Corporate diversification and organizational structure: A resource-based view. Acad Manage J 39(2), 340367. Montgomery, C.A., Wernerfelt, B., 1988. Diversification, Ricardian rents, and Tobins q RAND. J Econ 19 (4), 623632. Newsweek, 1997. South Korea foreign medicine. December 15, 3839. Nguyen, H., Devinney, T.M., 1994. Limits of growth of the multidivisional firm: a case study of the U.S. oil industry from, 193090. Strat Manage J 15 (7), 503520. Penings, J.M., Barkema H., Douma, S., 1994. Organisational learning and diversification. Acad Manage J 37(3), 608640. Prendergast, R., 1990. Causes of multiproduct production: the case of the engineering industries in developing countries. World Dev 18 (3), 361370. Rumelt, R.P., 1974. Strategy, structure, and economic performance. Harvard University Press, Cambridge, MA. Sadtlet, D., Campbell, A., Koch, R, 1997. When large companies are worth more dead than alive. Capston, London. Servaes, H., 1996. The value of diversification during the conglomerate merger wave. J Finance 51, 12011225. Singh, A., 1995. Corporate financing patterns in industrialising economies. International Finance Corporation, Technical Paper no. 2, Washington DC. Singh, A., 1996. Savings, investment and the corporation in the East Asian miracle. East Asian Development Project, UNCTAD/OSG/STUDY. 9, March. Suehiro, A, 1993. Family business reassessed: corporate structure and late-starting industrialisation in Thailand. Dev Econ XXXI (4), 378407 Tallman, S., Li, J., 1996. Effects of international diversity and product diversity on the performance of multinational firms. Acad Manage J 39 (1), 179196. UNCTAD, 1993. Analysis of national experiences in horizontal and vertical diversification, including the possibilities for crop substitution UNCTAD, TD/B/CN.1/14. UNCTAD, 1994. Analysis of ways and means to improve market opportunities for commodities in the medium term, with emphasis on examination of the best ways of achieving diversification, taking into account competitiveness, market trends and opportunities TD/B/CN.1/24. UNCTAD, 1995a. Recent developments in the diversification of developing countries commodity exports UNCTAD/COM/62. UNCTAD, 1995b. Analysis of national experiences in horizontal and vertical diversification, including the possibilities for crop substitution: Malaysia UNCTAD/COM/73. UNCTAD, 1997a. Diversification in commodity-dependent countries: The role of governments, enterprises and institutions A report prepared for the UNCTAD secretariat, UNCTAD, Geneva. UNCTAD-DTCI, 1997. World investment report, 1997. United Nations, New York and Geneva. Ungson, G.R., Steers, R.M., Park, S.H., 1997. Korean enterprise: the quest for globalisation. Harvard Business School Press, Boston, MA.
140
Vonurtas, N.S., Safioleas, S.P., 1997. Strategic alliances in information technology and developing country firms: recent evidence. World Dev 25 (5), 657680. Wernerfelt, B., Montgomery, C.A., 1988. Tobins q and the importance of focus in firm performance. Am Econ Rev 78 (1), 246250. Wilson, R., 1994. The economic relations of the Middle East: towards Europe or within the region? Middle East J 48 (2), 356367. World Bank, 1990. Agricultural diversification: policies and issues from East Asian experience. Policy Res Series 11, pp. 1227. World Bank, 1999. World development report 1998/99. Oxford University Press, Oxford and New York. Zikmund, W.G., 1994. Business research methods. Fourth edition. The Dryden Press, Philadelphia.

Diversification Strategies of Developing Country Firms PDF

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Diversification Strategies of Developing Country Firms PDF

Загружено:

Авторское право:

Доступные форматы

Journal of International Management 5 (1999) 115140

Diversification strategies of developing country firms

L. Nachum/Journal of International Management 5 (1999) 115140

L. Nachum/Journal of International Management 5 (1999) 115140

L. Nachum/Journal of International Management 5 (1999) 115140

L. Nachum/Journal of International Management 5 (1999) 115140

L. Nachum/Journal of International Management 5 (1999) 115140

L. Nachum/Journal of International Management 5 (1999) 115140

L. Nachum/Journal of International Management 5 (1999) 115140

L. Nachum/Journal of International Management 5 (1999) 115140

Fig. 1. Firms perception of diversification.

L. Nachum/Journal of International Management 5 (1999) 115140

Fig. 2. Objectives of diversification of incorporated firms.

L. Nachum/Journal of International Management 5 (1999) 115140

1st obj. 0.05 0.37 0.12 0.01

2nd obj. 0.02 0.20 0.25 0.08

L. Nachum/Journal of International Management 5 (1999) 115140

Acquisition1 0.853 0.705 0.176

Internal development 0.137 0.833 0.666

Via foreign partnership 0.310 0.166 0.333

Hire/purchase external resources 0.551 0.000 0.000

Shares of diversification moves in which new skills were acquired.

L. Nachum/Journal of International Management 5 (1999) 115140

L. Nachum/Journal of International Management 5 (1999) 115140

0.00 0.00 1.00 1.00

0.00 0.00 0.00 1.00 1.00 1.00

L. Nachum/Journal of International Management 5 (1999) 115140

L. Nachum/Journal of International Management 5 (1999) 115140

Diversifications (n) 47 32 27 20 3 25 1 1 156

L. Nachum/Journal of International Management 5 (1999) 115140

L. Nachum/Journal of International Management 5 (1999) 115140

0.86 1.00 0.56 1.00

0.92 1.00 1.00 1.00

L. Nachum/Journal of International Management 5 (1999) 115140

Operation measure(s)1 GDP, Billion $

Regression statistics (t-values) 0.00199 (2.45)*

Capital market structure

Risk and uncertainty

Firm-level characteristics General statistics

0.0000 (1.01) n 44 Adj. R square: 0.689 Sig. F 0.000

L. Nachum/Journal of International Management 5 (1999) 115140

L. Nachum/Journal of International Management 5 (1999) 115140

L. Nachum/Journal of International Management 5 (1999) 115140

L. Nachum/Journal of International Management 5 (1999) 115140

L. Nachum/Journal of International Management 5 (1999) 115140

Вам также может понравиться