Is the Interaction of International Diversification and Economic Performance a Linear Relationship?

The current study analyses the effect of an international diversification strategy measured by multi-nationality and country scope, and tests its relationship with economic performance in the context of Australian corporate activity. Evidence from previous US studies on the relationship between international diversification strategy and economic performance was inconclusive, which suggests that research should go further with empirical analysis than testing for a linear relationship and should test for curvilinear relationships resulting from transactions costs analysis. Guided by that evidence a Chow test was used in the current study to establish a cut-off point that divided the sample of Australian firms into two subgroups (low-to-moderate and high level international diversification) to determine whether a non-linear relationship existed between economic performance and international diversification. This approach followed a similar technique used by Hitt, Hosskisson and Kim, (1997) and was used in this study as a method for determining two subgroups. The sample was selected from the population of large firms in Australia over a three-year period covering 1993-1995. The results suggest there is a statistically significant non-linear relationship between economic performance and multi-nationality. The results suggest that Australian corporations may be sensitive to the effect of transaction and managerial processing costs on the relationship between multi-nationality and economic performance resulting in a non-linear relationship.