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Diversification And Performance Essay

4053 words - 17 pages

Literature Review

Overview

Geographic diversification refers to a firm's expansion beyond its border. Capar and Kotabe (2003) viewgeographic diversification as a firm's expansion beyond the borders of its home country across different countries and geographical regions. They posit that the terms, international diversification, multinationality, and international diversity, are often used interchangeably in the diversification literature. According to Qian (1997), international market diversification refers to firms which are horizontally or vertically integrated across different national sub-markets.

The findings show that geographic factors have the largest influence on the ...view middle of the document...

There is even an S-curve hypothesis advanced to reconcile the alternative
explanations (Lu and Beamish, 2004).

Kumar, 1984 and Yoshihara, 1985) even found no significant relationship. The inconsistencies in reported findings may be attributed to differences in methodologies, sampling, measures of geographic diversification and performance, and the analytical methods employed. An inverted U-shaped effect tends to be shown in studies based on samples of large, well-internationalized firms, while a U-shaped effect has been found in studies of samples of small to medium-sized firms (Lu/ Beamish 2004).

Thus, while some studies confirmed the positive relationship (Delios and Beamish, 1999), some others showed negative relationship (Geringer et al. 2000). More recently, taking into account the transaction and coordination costs involved in internationalization, some scholars advanced the possibility of a curvilinear relationship between the two. While Hitt et al. (1997) and Qian (2002) proposed an inverted U-shaped relationship; Lu and Beamish (2001) suggested a U-shaped curve. There is even an S-curve hypothesis advanced to reconcile the alternative explanations (Lu and Beamish, 2004).

Geographic diversification is considered as an important portfolio strategy by most real estate investors. In an early survey of the investment practice of real estate investment trusts (REITs), Webb and McIntosh (1986) reported that, among investors who make systematic efforts to diversify their holdings, over 90% of them consider varying the geographic locations of properties the most popular method of diversification. In a more recent survey among pension fund real estate holdings, Worzala and Bajtesmit (1997) indicated that 73% of the managers consider geographic diversification at the regional levels, and 23.9% of these managers consider diversification at the metropolitan area level in their asset allocation process. While the evidence seems compelling that investors do attempt to diversify across geographic locations, their choices seem to be limited to a few so-called "core locations." Shilton and Stainley (1995) surveyed the NCREIF property database and found that institutional real estate investments are highly concentrated in large counties and/or metropolitan areas. Their findings indicate that about 30% of NCREIF properties are located in the seven largest counties, 45% in the largest fifteen counties, and nearly 60% of all investments are in the largest thirty counties, which represent twenty-six distinct metropolitan areas. Given there are over 320 metropolitan areas and more than 3,000 counties in the United States, such high concentration of institutional real estate holdings raises questions as to the effectiveness and appropriateness of institutional investment strategies.

Advantages

The recent trade literature has examined how firms undertake global presence. Explanations for the existence of the multinational firm are found,...

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