Multinationals' diversification and the risk‐return trade‐off

Multinationals' diversification and the risk‐return trade‐off This paper advances a theoretical rationale to explain Bowman's paradox (1980) that firms with high returns can have low risk. Here we draw on the rich body of international management research and argue that global market diversification, which provides firms with three distinct options and opportunities over domestic firms, can explain the high return‐low risk profile. We also argue that no strong theoretical rationale exists in support of either related or unrelated product diversification generating such a favorable risk‐return profile. By integrating both the product and the global market dimension of diversification into our analyses and by controlling for the industry effect, this paper sheds new light on the relationship between corporate diversification and the risk‐return tradeoff. The results of this research, which are based on the diversification experiences of 125 multinationals, reveal the strikingly important, though so far overlooked, role that global market diversification plays in the joint management of corporate risk and return. Global market diversification here reflects both the multiplicity of international market areas in which a firm operates and the distribution pattern of a firm's industries across these multiple areas. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Strategic Management Journal Wiley

Multinationals' diversification and the risk‐return trade‐off

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Publisher
Wiley
Copyright
Copyright © 1993 John Wiley & Sons, Ltd.
ISSN
0143-2095
eISSN
1097-0266
DOI
10.1002/smj.4250140404
Publisher site
See Article on Publisher Site

Abstract

This paper advances a theoretical rationale to explain Bowman's paradox (1980) that firms with high returns can have low risk. Here we draw on the rich body of international management research and argue that global market diversification, which provides firms with three distinct options and opportunities over domestic firms, can explain the high return‐low risk profile. We also argue that no strong theoretical rationale exists in support of either related or unrelated product diversification generating such a favorable risk‐return profile. By integrating both the product and the global market dimension of diversification into our analyses and by controlling for the industry effect, this paper sheds new light on the relationship between corporate diversification and the risk‐return tradeoff. The results of this research, which are based on the diversification experiences of 125 multinationals, reveal the strikingly important, though so far overlooked, role that global market diversification plays in the joint management of corporate risk and return. Global market diversification here reflects both the multiplicity of international market areas in which a firm operates and the distribution pattern of a firm's industries across these multiple areas.

Journal

Strategic Management JournalWiley

Published: May 1, 1993

References

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