Corporate international diversification: the impact of foreign competition, industry globalization and product diversification

Significant reductions in barriers to international commerce since the mid-1970s have resulted in markets and industries becoming increasingly integrated across nations. A key consequence of industry globalization has been substantially increased levels of foreign competition in the markets of most nations, and in particular in the U.S. marketplace. The changes in competitive conditions facing firms as markets and industries become more globalized are significant economic phenomena that can be expected to impact corporate strategy in general, and corporate international diversification strategy in particular. Despite increasing global economic integration, the impact of industry globalization on corporate strategy is a question that has been largely overlooked in both the strategic management and international business literatures. This paper seeks to fill this important gap by examining the role of both environmental and firm specific factors in shaping a firm’s international diversification strategy. Specifically, we develop a theoretical framework for understanding how industry globalization, foreign competition, and firm product diversification would be expected to influence a firm’s strategic choice of its level of international diversification. We then empirically examine for the predicted impact and importance of these factors in a panel data set of U.S. firms from 1987 to 1993. Our study provides the first empirical examination and evidence that industry globalization and foreign-based competition are statistically significant factors explaining the increased international diversification of U.S. firms.