the mpact of diversification on the performance of by · between diversification (geographical...
TRANSCRIPT
THE MPACT OF DIVERSIFICATION ON THE PERFORMANCE OF
ASIAN COMPANIES AMID THE 1997 FE^ANClAL CRISIS
by
CHAN KEI-SHUN KEFTH 陳其信
YEUNG YU-HUNG ANTONIA 楊如虹
MBA PROJECT REPORT
Presented to
The Graduate School
bi Partial FulfiUment
ofthe Requirements for the Degree of
MASTER OF BUSINESS ADMINISTRATION
THREE-YEAR MBA PROGRAMME
1 THE CHINESE UMVERSITY OF HONG KONG
May 1999
The Chinese University of Hong Kong holds the copyright of this project. Any person(s) intending to use a part or whole of the materials in the project in a proposed publication must seek copyright release from the Dean of the Graduate School.
.iT-r 'r&s gj / ¢ ^ ; ¾ ^ ¾
/ 务 / i ^ j ^ 圖 \ A fe/ — — — � ^ ^ ^ : ; : \ 2 1 a 簡 ) g |
. ' � ~ ' ~-^^1., ^^jt^—->-v-^_-^.-_>_._y C ^ jm
-.:\ UNIVERSITY fe/ �> jJBRA;Y s-;zjmy^ ;,:,;7\ 一 . < ^
灣 、 ( [ 。 丨 3 ^ '«»i*H.«.ii-: *
APPROVAL
Name : Yeung Yu-Hung Antonia, Chan Kei-Shun Keith
Degree: Master ofBusiness Administration
Title ofProject: The Impact ofDiversiflcation on the Performance of Asian Companies amid the 1997 Financial Crisis
^ ^ ^ 2 = ^ \ Professor Shigefumi Makino
� Date Approved: A ^ O y t . / 9 9 ^
ii
ACKNOWLEDGEMENT
We acknowledge, with our most sincere gratitude, the advice of our project supervisor
Professor Shigefumi Makino of the Department of Management, The Chinese
University ofHong Kong. This project would not have been possible without Professor
Makino's immense support and guidance.
:- .:::--1 = >•:: --•
/
/
iii
ABSTRACT
Most studies on the relationship between diversification and firm performance
concentrate on companies in the West. This study aims to explore the impact of
diversification on the performance of companies in Asia. Special focus is placed on
firm performance during the 1997 Asian Financial Crisis. Secondary data on
diversification and performance of 488 listed companies from China, Hong Kong,
Monesia, Malaysia, and Taiwan during the relevant period are examined. Correlations
between diversification (geographical market, product, and industry) and firm
performance (sales and profit growth) are studied to help shed light on the extent of
influence diversification strategies has on the performance of Asian firms. Insights to
how Asian firms may avoid damage in tough economic times are therefore drawn from
thc study.
Our findings show that the impact of diversification tends to vary across countries.
Despite the fact that Asian firm performance tends to improve with more product
diversification and less industrial diversification much like that of their Westem
counterparts, unlike the latter, Asian firms appear to benefit from less geographical
market diversification rather than more. Although the extent of the three types of
diversification examined does not have a statistically significant impact on Asian firm
performance in general, size and profit level do show significant influence on firm
performance for some countries.
iv
TABLE OF CONTENTS
ACKNOWLEDGEMENT ii
ABSTRACT iii
TABLE OF CONTENTS iv
LIST OF TABLES vi
LIST OF FIGURES vii
LIST OF APPEKDICES viii
Chapter I. mXRODUCTION 1
Diversification and Firm Performance 1 The Asia Financial Crisis ‘ 2
II. THEORY AND LITERATURE REVffiW 5
Internationalization 6 Market Concentration vs. Market Diversification 7 Product Diversification 9
‘ Competitive Advantage 10 Diversification Strategies for Emerging Markets 10
V
III. HYPOTHESES 12
IV. DEFrNITION OF VARIABLES AND METHODOLOGY 15
Sample 15 Measures 17
Market (International) Diversification (GEO) 17 Diversification ^)IV) — Product and Industry 18 Firm Performance 19
Methodology 19
V. RESULTS 21
Market, Product, and Industrial Diversification 21 Firm Performance 25 Categorization ofFirms Based on Sales Growthy^rofit Growth Standing 28 Sales Growth as a Function ofMarket, Product, Industrial Diversification and 1997 Sales and Profit 35 Sales Growth as a Function ofMarket, Product, and Industrial Diversification 36 Profit Growth as a Function ofMarket, Product, Industrial Diversification, and 1997 Sales and Profit 37 Profit Growth as a Function ofMarket, Product, and Industrial Diversification 38
VI DISCUSSION AND CONCLUSION 40
Implications to Managers 43 Further Research and Limitations 44
APPENDICES 46
BffiLIOGRAPHY 53
vi
LIST OF TABLES
Table 1 Mean Scores for GEO, DIVproduct, DIVbdustry 21
Table 2 Average Sales and Profit Performance (Year 1996 to Year 1997) 25
Table 3 Distribution of Firms Based on Categorization of Sales Growth and Profit Growth Standing 29
Table 4-1 B Values and Significant T Values of the Regression Formula:
Sales growth = Bo + Bi* GEO + B2* DIVp^^^, + B3* DIVind_ + B4* sales97 + 65* profit 97 35
Table 4 —2 B Values and Significant T Values of the’ Regression Formula:
Sales growth = Bo + B,*GEO + � * DlV—uet + ^ * DIV^,^^ 36
Table 5 —1 B Values and Significant T Values of the Regression Formula:
Profit growth = Bo + Bi* GEO + B2* DIVp^^^ , + B3* DIVind— + B4* sales97 + 65* profit 97 37
Table 5 - 2 B Values and Significant T Values ofthe Regression Formula:
Profit growth = Bo + B,*GEO + O2* DIV^^^^, + B3* DIV^,^^ 38
vii
LIST OF FIGURES
Figure 1- 1 Scores for Geographical Diversification -Market Concentration Measures 22
Figure 1-2 Scores for Product Diversification -Product Concentration Measures 23
Figure 1-3 Scores for Industrial Diversification -
Industrial Concentration Measures 23
Figure 2-1 Average Sales Performance (Year 1996 to Year 1997) 26
Figure 2-2 Average Profit Performance (Year 1996 to Year 1997) 27
Figure 3 Categorization Based on Sales Growth and Profit Growth Standing.....28
Figure 3-1 Performance of All Countries 30
Figure 3-2 Performance of China 31
Figure 3-3 Performance ofHong Kong 31
Figure 3-4 Performance ofIndonesia 32
Figure 3-5 Performance ofMalaysia 32
Figure 3-6 Performance of Taiwan 3 3
viii
LIST OF APPENDICES
Appendix 1 Mean Scores of GEO, DIVp and DIVi 46
Appendix 2 Average Sales Performance 47
Appendix 3 Average Profit Performance 48
Appendix 4 Categorization ofFirms based on Sales Growth
Standing 49
Appendix 5 Categorization ofFirms based on Profit Growth
Standing 50
Appendix 6 Categorization ofFirms based on Sales/Profit
Growth Standing 51
Appendix 7 Categorization ofFirms based on Sales/Profit
Growth Standing (by Country) 52
1
CHAPTER I
• R O D U C T I O N
Asian economies have been hit hard by the 1997 Financial Crisis. Countries
including Indonesia, Thailand, and Malaysia, have experienced their worst recession in
history. Unprecedented economic shrinkage and plummeted real GDP in the region
signify an adverse business environment for Asian firms/ Business outlook and the dawn
of economic recovery rest largely on how well these firms have performed amid the
devastating turmoil.
Diversification and Firm Performance
Variations in performance shed light on the extent of competitive advantage that
diversification strategies have helped bring. Existing empirical research in the U.S.
context suggests that firms perform better with high international (geographical market)
diversification and product diversification than otherwise (Qian 1997). One may
therefore infer that as diversification helps offset financial risks, companies highly
diversified in both geographical markets and products should perform better amid the
Financial Crisis. Advocates of the contrary belief, however, maintain that diversification
in general tends to distract businesses from focusing on their core
1 Kmgman, Paul. "Saving Asia: It's Time to Get Radical." Fortune 17 (September1998): 33-38.
2
competencies and resources, thereby becoming more vulnerable to adversity (Prahalad
et al. 1986). In fact, studies of multinational corporations (MNCs) from Hong Kong
indicate that given similar industrial diversification, internationalized Hong Kong firms
do not show superior performance over domestic ones (Wan 1998).
Insights to the impact of diversification strategies on firm performance have
critical significance to Asian businesses experiencing a time as difficult as the Asian
Financial Crisis. The more likely a firm is able to stabilize its earnings by offsetting the
negative impact of an economic crisis through diversification, the better is its chance of
surviving the ordeal. The outbreak of the Asian Financial Crisis has become one of the
most formidable challenges faced by Asian firms in recent history.
The Asian Financial Crisis
The Asian Financial Crisis began in mid 1997 and will probably turn out to be
the most significant and serious event of the world economy this decade. Within seven
months, most of the major Asian economies collapsed from being ‘Asian Economic
Miracle' to being called ‘Asian Economic Catastrophes' (Hasegawa 1998). The fact
that PricewaterhouseCoopers alone has expanded its liquidation-and-workout practice
in Asia four-fold to meet rescue demands in the region demonstrates the severity of the
disaster.2
-"Report Card on As ia , BusinessWeek Asian Edition (November 1998)
3
The Crisis spanned three major stages. The first broke out in Thailand from
April to August 1997 characterized by a substantial devaluation in the Thai Baht.^ The
fall led to a ‘contagion,effect throughout the region, with speculative pressure against
the Indonesia Rupiah, the Malaysia Ringitt, and the Philippine Peso) Companies in
the region suffered extensive damage. Among those is Thai Petrochemical Industry
(PLC) which reported lossess in the billions (Hasegawa 1998).
The second stage of the Crisis from September to October 1997 was marked
by the devaluation of the Taiwanese NT dollar in response to heavy speculative
pressure. Shortly after, the Hong Kong dollar fell under speculative attack. Although
the fixed exchange rate was eventually upheld the subsequent plunge of over 40
percent in the Hong Kong stock market also affected the U.S., European, and
Japanese markets.
The devaluation of the Korean Won as a result of heavy foreign debts and
short-term loans had been regarded as the third stage of the crisis from October to
November 1997. Over 70 percent of the established Korean chaebols, formerly
regarded as the key business entities of the country, failed to survive the test
(Hasegawa 1998).
Many regard the basic causes of the Crisis to be large savings-investment gap,
excessive reliance on foreign portfolio investment, and appreciating real exchange rate.
3 The first stage of the crisis was caused by the accumulation of foreign exchange reserves losses that had asserted great pressure on Thailand to devalue its currency, both to help its trade account and to stimulate the economy through low interest rate. Eventually on July 2, after a $23 billion loss of reserves, the Baht was devalued and immediately fell by 18 percent..
4
While the outbreak of the event may be associated with a variety of fundamental
problems at the business, corporate, and country levels, the question of whether or not
corporate strategies, diversification in particular, may help cushion the impact of
adversity as such acquires much relevance.
This study aims to explore the impact of diversification in shaping the
performance of Asian companies. Secondary data on diversification and firm
performance of 488 listed companies in Asia from the beginning of 1996 to the end of
1997 will be examined. Although previous studies on the relationship between
diversification and firm performance remain limited and inconclusive in the Asian
context, the 1997 Financial Crisis provides an ideal backdrop for the investigation of
factors determining the performance of Asian companies in tough economic times.
4 By August, all currencies in question had fallen from 14 percent to as much as 34 percent against the U.S. dollar.
5
CHAPTER II
THEORY AND LITERATURE REVffiW
Research in the study of firm performance, particularly that of multinational
enterprises, has dealt with correlations between firm performance and three major
forms of diversification, namely, geographical (international or market), product, and
industrial. A strong correlation has been found in the Westem context between
performance and the degree of international diversification, or simply put,
internationalization (Geringer et al. 1989). In addition, internationalization has
exhibited a positive relationship with performance in firms highly diversified in
products (Hitt et al. 1997). Industrial diversification, however, has demonstrated a
negative relationship with performance improvement (^uhner 1987).
To better understand the dynamics involved in diversification strategies, it is
worthwhile to examine the pertinent concepts in greater detail. One of the best known
empirical studies on firm performance and diversification was done in the 1960's when
Miller and Pras (1980) examined 246 U.S. MNCs for over three years. Their research
showed that profit stability depends on geographical diversification but not on
industrial diversification. Research done by Buhner (1987) studied 40 German MNCs
over a 15-year time span and found that firm performance was positively
6
related to geographical diversification and negatively related to industrial
diversification. However, in 1995,Sambharya looked at 53 MNCs from a decade
before and concluded a negative relationship between geographical and industrial
diversification. It was found that neither is related to firm performance individually
although the combined effect leads to enhanced performance.
Internationalization
Internationalization is the process through which firms adopt overseas business
activities to gradually increase their international involvement (Cavusgil 1980,
Johanson and Vahlne 1977). Olusoga (1993) proposed that internationalization is
motivated by the following reasons, they are: "imperfections in goods and capital
� markets throughout the world", "ownership of specific advantages derived from
technology and marketing skills", "markets are costly and inefficient for
undertaking certain types of transactions", and “location-specific factors such as trade
barriers and government policies."
»
A broad geographical scope of operations may allow a firm to attain
competitive advantage through exploiting the benefits of increased intemal activities
(Rugman 1981). In addition, firms become more appreciative of the inter-relationships
between different segments, geographical areas or related industries (Porter 1985).
7
Market Concentration vs. Market Diversification
Two alternative strategies available to business firms expanding operations into
different foreign markets are "market concentration" and "market diversification"
(Ayal and Zif 1979, Olusoga 1993). Market concentration is the "purposeful selection
of relatively few markets and the channeling of resources into these markets with the
objective of securing significant market shares" (Albaum et al. 1989,Piercy 1982).
Strengths pertinent to market concentration include market specialization, economy of
scale, greater market knowledge, and high degree of control (Olusoga 1993).
Market diversification implies spreading resources over a large number of
markets in an attempt to "reduce risks of concentrating resources and to exploit the
economies of flexibility" (Albaum et al. 1989). Market diversification is associated
with greater flexibility, less dependence on particular markets, and lower perception of
risk (Albaum et al. 1989). ‘
To date there is a lack ofagreement among researchers about which of the two
alternative strategies produces better business performance (Lee and Yang 1990). With
regard to profitability, BETRO Trust Committee (1976), and ITI (1979) reported that
market concentration produces better performance results than market diversification
because of the former's ability to secure large market shares. On the contrary, Hirsch
and Lev (1973), and JMR (1978) reported that market diversification produces better
performance because of the ability to avoid direct confrontation with large firms
(Olusoga 1993). Based on these conflicting findings, Lee and Yang (1990) concluded
8
that choice of an international expansion strategy ought to depend on institutional
factors such as market, company, and marketing mix elements.
In terms of profit stability, market diversification appears to help stabilize
earnings (Eiteman and Stonehill 1979, Rugman 1979). Economic conditions underlying
goods and factor markets and political climates tend to be uncorrelated across different
international market areas, thereby stabilizing the overall retums of firms O^m et al
1989). Olusoga (1993) concluded that as market diversification offers higher
profitability than market concentration, and also produces more profit stability to
business firms than market concentration, therefore market diversification strategy
should be the "strategy of first choice for business firms embarking on international
market expansion."
Olusoga further asserts that overall performance of a firm in international
markets will be determined by the quality of sales it generates in these markets, which
in tum will be influenced by its internationalization strategy. The lower the firm's
extent of internationalization, the more it can concentrate its efforts on the more
profitable portions of its international markets in order to generate quality sales and
high performance (Olusoga 1993). On the contrary, Olusoga added, firms with a
higher degree of internationalization will be constrained to sales from both the more
and less profitable markets, hence generating lower quality sales and performance
results.
One further concem is the fact that geographical diversification implies costs in
terms of co-ordination, support, and service activities among markets (Porter 1985).
9
Although advancement in technology gradually obscures the traditional distinction
between domestic and foreign operations, costs incurred as a result of geographically
diverse operations can reduce or offset the potential benefits brought about by
increased exposure to business opportunities (Geringer et al. 1989).
Product Diversification
Tallman & Li (1996) believed that gradual expansion through related markets
can reduce external uncertainties. In this way, geographical diversification is
conceptually similar to engaging in related product diversification to generate profits.
According to Tallman and Li, the fact that Resource-based Theory (Bamey
1991) and Core Competency Theory (Prahalad & Hamel 1990) attribute competitive
advantage to a firm's internal strength purports that greater profitability will result from
product diversification generating economies of scope in the use of firm resources. As
a firm's core competence is essentially its "collective ability to efficiently and effectively
combine knowledge and technology in order to eam profits, survive,and grow"
(Wrigley 1970), it becomes apparent that allocation of firm resources, as governed by
diversification strategy, is critical to the firm's success. Although Transaction Cost
Theory alerts that excessive growth will eventually raise governance costs and thus
reduce profits (Jones & Hill 1988),research has recognized that product diversification
and internationalization contribute to a firm's competitive advantage.
10
Competitive Advantage
Competitive advantage is the "tangible or intangible characteristic of an
organization which rivals cannot imitate without incurring substantial cost and
uncertainty" (Kogut 1985, Porter l985). Inter-relationships among a firm's businesses
can influence its ability to attain competitive advantage OPorter 1985). Sustainability of
competitive advantage rests upon company strategy and managerial decisions on
resource allocation and development. In the context of MNC's strategy to deploy
resources, diversification strategy and the degree of internationalization constitute the
company's primary considerations with regard to product range and market
distribution (Geringer et al. 1989).
Diversification Strategies for Emerging Markets
Current studies have attributed variations in the success of diversification
strategies to differences in institutional contexts and firm-specific advantages. Khanna
and Palepu (1997) pointed out that the impact of diversification in advanced countries
such as the United States and the United Kingdom is essentially different from that in
developing or emerging economies such as Indonesia and India as a result of variations
in infrastructure and market fundamentals. Since institutions and activities such as
capital and labor markets, financing, and regulatory mechanisms are relatively less
mature in developing countries, conglomerates find it essential to diversify into
ancillary activities often unrelated to their core business. In fact, while core
competencies and focused strategies form the basis for corporate growth in advanced
11
countries, many successful domestic corporations in emerging markets adhere to
unrelated diversification (Khanna and Palepu 1997).
12
CHAPTER III
HYPOTHESES
Former studies reveal that internationalization has a positive impact on firm
performance (Qian 1997). This is due to the fact that firms would gain from economies
of scale through investing in overseas markets. Firms would also gain higher profit
stability given less reliance on a few markets. Therefore, we may assume that with
increased internationalization and diversification, potential investment risks during the
financial crisis will decrease, hence the firm's overall performance will be more stable.
The first hypothesis of this study follows that:
Hypothesis 1: Asian firms investing more internationally tend to suffer less damage
during the Financial Crisis than those investing more in their home country.
Complementary to the relationship between internationalization and firm
performance is the evident association to product diversification. Product
diversification can be defined as the degree of diversification within an industry (Qian
1997). Synergy arisen through such diversification helps facilitate the exploitation of
economies of scope. A diversified firm can therefore make use of the skills and
knowledge acquired in one business to tackle challenges and exploit opportunities in
others (Qian 1997). Hence, it is hypothesized that:
13
Hypothesis 2: Asian firms engaged in more product diversification tend to suffer less
damage during the Financial Crisis than those engaged in less product
diversification.
Apart from diversification within the industry, another dimension can be referred
to as industrial diversification, that is, diversification across industries (Qian 1997).
Industrial diversification differs from product diversification in that the former provides
little synergy. Governance and administration difficulties increase as firms take up
businesses which deviate from its core competence. The effort needed to acquire new
resources and know-how as a result of the diversification reducesAlthough many
successful Asian companies advocate unrelated diversification out of institutional need,
the impact of the Financial Crisis implies extra effort for companies to effectively
� manage its diversified industrial portfolio, thereby asserting greater costs. It is thus
hypothesized that:
Hypothesis 3: Asian firms engaged in narrow industrial diversification tend to suffer
less damage during the Financial Crisis than those engaged in broad industrial
diversification.
Incorporating the rationale from hypotheses 1-3,it is hence hypothesized that:
Hypothesis 4: During the Financial Crisis, Asian firms investing in more
international markets, with more product diversification and narrow industrial
diversification suffered the least damage; those investing more locally, with little
14
product diversification and broad industrial diversification suffered the most
damage.
It is noted that acceptance ofHypothesis 4 is depended upon the acceptance of
the previous three as it is derived based on the underlying rationale previously
mentioned.
15
CHAPTER IV
DEFESriTION OF VARIABLES AND METHODOLOGY
Sample
Data for the study are drawn from the entire set of the latest financial information
on 488 publicly listed Asian companies considered most representative from China
(30), Hong Kong (220), Indonesia (70), Malaysia (68),and Taiwan (100) listed in the
Asian Company Handbook 1999.5
Since this study is focused on the companies' financial performance before and
right after the Asian Financial Crisis, financial data (revenues and pre-tax profit) used
to calculate the performance of profit growth and sales growth are based on figures
taken from the 1996 and 1997 annual reports of the companies listed in the source data
under "Business Results".
5 Information contained in the handbook is based on research and studies conducted by the following data suppliers: Wardley Data Services Ltd. (China and Hong Kong), PT HSBC Securities Indonesia (Indonesia), Mayban Securities Sdn. Bhd. (Malaysia) and lnfoTimeS" databank Center fTaiwan). The data are then complied by the Toyo Keizai Inc. Japan Company Handbook editorial staff.
16
Information for geographical diversification is drawn from revenue data listed
under the section “Overseas Business Locations” in the source data which outlines the
i �
I
i
:i I
17
•
revenue percentage of each market in relation to the total revenue of the company. For
product and industrial diversification, information is drawn from revenue data
listed under the section "Revenue Breakdown" in the source data which outlines the
revenue percentage in each product line and its corresponding industry in relation to
the total revenue of the company.
Measures
Testing for the acceptance of Hypotheses 1 to 3 requires the examination of the
individual company's degree of diversification in geographical market, product, and
industry. The three measures are expressed in scores derived from the following
calculations.^
Geographical Market (International) Diversification (GEO)
Geographical diversification is calculated using the revenue percentage of each
market in relation to the total revenue of the company. The markets are divided into
local market, Asia, North America, South America, Europe, Australia, Africa, and
others. We shall use the entropy measuring market diversification:
m
GEO = SQRT ( Z P.) /=i
Where m is the number of international regions in which a firm has business and P is
the proportion of a firm's sales in the i^ region to the firm's total sales.
6 Entropy measures used in this study are developed and modified from those used by Wan 1998) and validated by Hoskisson et al. (1993).
18
Diversification (DIV) 一 Product and Industry
Similarly, product and industrial diversification are calculated using the revenue
percentage in each product line and its corresponding industry in relation to the total
revenue of the company. Industries are identified and classified according to SIC
(Standard Industrial Classification) whose categorization is largely determined by the
corresponding industrial activity. Industries are classified into Agriculture, Mining,
Real Estate and Financial Services, Wholesale, Retail, Service, Transportation,
Construction, Administration, and others.
Alike market diversification,product diversification can be expressed by the
entropy measure described below:
n
� DIVproauet = SQRT(ZP, . ' ) /=i
Where n is the number of products a firm has business in, and Pj is the proportion of a
firm's sales in the i^ product to the firm's total sales.
Industrial diversification is measured by the following entropy measure:
n
DIV ^ ,^^ = SQRT(ZP,2) /=i
Where n is the number of industries a firm has business with, and Pj is the proportion
of a firm's sales in the i^ industry to the firm's total sales.
19
Firm Performance
Firm performance is measured by sales growth and profit growth. Sales growth is
the average of the change in sales between Year 1996 and Year 1997 whereas profit
growth is the average of the change in profits before tax between Year 1996 and Year
1997.
Methodology
To study the relationship between a dependent variable and two or more
independent variables, multiple linear regression is used. In our study, we use SPSS-
enabled computer calculations in multiple regression analysis; profit growth and sales
growth are selected as dependent variables whereas market diversification measure
’ GEO, product diversification measure DIVpr�duct,industrial diversification measure
DIVindustry,^alcs 1997,and Profit 1997 figures are the independent variables. To
examine the impact of diversification on sales and profit growth, the following multiple
linear regression formulae have been run:
(1) Sales growth = Bo + Bi* GEO + h * DIVp^^^, + B3* D I V ^ ^ ” + B4* sales97 +
B5* profit 97
(2) Sales growth = Bo + B ,GEO + 1¾* DIV^^, , + B3* D I V —
(3) Profit growth = Bo + IV GEO + � * DIV—u«:t + ^ * DIV^^,^^ + 84* sales97 +
65* profit 97
(4) Profit growth = Bo + Bi*GEO + 62* DIVpr—t + ^ * DIV,„,^^
2 0
Sales 1997 and Profit 1997 are included for sales growth and profit growth
functions exemplified in (1) and (3) respectively. The reason to use these two
independent variables is that they account for the impact the Asian Financial Crisis had
on the sales and profit growth of Asian companies that year. A comparison of the
regression findings between (1) and (2), and (3) and (4) is expected to provide insights
to how significant the Crisis might have been in affecting firm performance.
To further our study of the relationship between company performance and
diversification strategy of companies in each country, regression down to per country
level has been performed. In brief, each set of regression has been generated for
companies in China, Hong Kong, Indonesia, Malaysia, and Taiwan.
21
CHAPTERV
RESULTS
Market, Product, and Industrial Diversification
Using the defined value of diversification, mean GEO, DIVp^^^^ , and DIVj^j^^^
scores of the sample are summarized in Table 1 according to their place of origin?
Ranging from 0 to 1,scores closer to 1 depict increasing concentration in market,
product or industry, in other words, a lower degree of diversification.
Table 1 Mean Scores for GEO, DIVproduct,. DIVindustry
f E Q E Q S 3 ^ E Q B 3 f f i S Q 3 3 P K S S i H P E ! S H 9 l i E S S ! H S V China ^0 0.9919 0.8993 0.9383
Hong Kong ^ ~~• 0.8576 0.7513 0.9134~~~ Indonesia 70 0.9590 0.7548 0.9796 Malaysia ^ 0.9788 0.8128 0.8916 Taiwan [ ^ 0.8782 0.6899 0.9830 Total 488 0.9015 0.7569 0.9357
7 For the sake of convenience, the five places are termed "country" in the subsequent analysis.
2 2
Figures 1-1, 1-2,and 1-3 exhibit the corresponding graphical representation of
mean GEO, DIVproduct, and DIVindustry scores of the sample companies in each country.
The closer a value is to 1, the higher is its concentration, hence the lower its degree of
diversification.
Figure 1-1 Scoresfor Geographical Diversification -Market Concentration Measures
, ^ ^ ^ ^ ^ M ^ M ^ ^ ^ ^ ^ M n g J l ^ ^ ^ g g J l ^ g ^ ^ ^ ^ H
. � : 6 1 M ^ M B M M I W H I o 』 I B ^ M B M ^ M B 8 B 1
: : i l S l B M i B B M B 0 w _ _ _ _ _ r w ^ i
China Hong Kong hidonesia Mateysia Taiwan Total Sampte
Country
*
With reference to geographical diversification, it is evident that companies from
China are the least diversified (GEO 0.9919), followed by Malaysia, Indonesia, and
Taiwan. Companies from Hong Kong are the most diversified (GE00.8576).
23
Figure 1-2 Scores for Product Diversification -Product Concentration Measures
^^^^MIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII||||||||
I : ; H i i i l H i l p
02 K ^ B - ^ ^ P B | i B i U M K ^ B i E ^ H S K ^ B H | ^ ^ ^ j j ^ ^ ^ : | ^ i | | j ^ ^ [ ^ j | ^ M ^ M | i ^ M | 1 K ^ M | H
0 ^ ^ iiiiii jMiroi^^W^lB^^^M^Px^H^pfeB|3| |fftf*^Pl M'i |Mli ^W^JBil| China Hong Kong hdonesia Malaysia Taiwan Total Sampte
Country
In terms of product diversification, while companies from China are once again
the least diversified (DIVproduct 0.8993), Taiwanese companies manifest the highest
level of product diversification among the sample companies O IVproduct 0.6899).
Figure 1-3 Scoresfor Industrial Diversification -Industrial Concentration Measures
1 H K ! i B i B ^ ^ ^ 3
j i H — China Hong Kong hdonesia Malaysia Taiwan Total Sampte
Country
2 4
Taiwanese companies show the least diversification in the industrial dimension
(DIVindustry 0.9830). THcir counterparts in Malaysia, however, are most diversified in
this regard (DIVindusu7O.89i6).
With reference to the results, several observations become apparent. First of
all, Chinese firms are the only ones in the sample showing a high concentration in all
three measures (GEO, DIVproduct, DIVindustry). This outcome suggests that many Chinese
firms are virtually single-product producers with a domestic orientation. Unlike their
counterparts in China, Hong Kong firms tend to be more diversified in general. Taiwan
firms also demonstrate relatively high diversification in geographical and product
markets, although industrial diversification tends to be low, meaning that many firms in
Taiwan opt for aggressive international expansion with a wide portfolio of related
products. On the contrary, most Indonesian firms exhibit a highly diversified product
portfolio within a narrow geographic and industrial scope. Malaysian firms also focus
on the domestic market with relatively high product and industrial diversification. In a
nutshell, our findings suggest that Chinese firms are the least diversified and Hong
Kong firms the most diversified among the sample Asian firms. Other firms stand
between the two extremes.
2 5
Firm Performance
To study the average performance of companies in the sample, the corresponding
sales and profit growth figures from 1996 to 1997 are examined. The sample of 488
companies exhibit varied performance over the period of study. Their mean
performance figures are summarized in Table 2 below:
Table 2 Average Sales and Profit Performance (Year 1996 to Year 1997)
China }0 15.03% 17.67% Hong Kong 220 “ -0.07% 29.46% Indonesia 70 “ 62.16% -140.10% Malaysia 68 “ 16.92% -18.03% Taiwan 100 _ 10.16% 59.45% Total 488 14.25% 3.94o/o
26
Figures 2-1, and 2-2 illustrate the country by country sales and profit
performance respectively.
Figure 2-1 Average Sales Performance (Year 1996 to Year 1997)
1 :麗|||| I l | • I _ M8 fW*tntt m t w wtwttttt itiJ'MtptWWUW ayimwiniMi|m iininm t|tii|itllllf
-10% Mehin^^M«Hong^mmaM^nes7in^^MalayWMaaf i iwat f i«aTOrc^far^^ Kong Sample
Country
Sales growth among the five countries varies to a considerable extent.
Compared to the average growth of 14.25 percent, Indonesian companies achieved an
extremely outstanding growth of 62.16 percent. At the other extreme are Hong Kong
companies which experienced a negative sales growth.
27
Figure 2-2 Average Profit Performance (Year 1996 to Year 1997)
1沉% MlilMiWIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII Mt # H |MMtH Hf H Q jomom mmmummmQ m mmumm HH BH B 丨 i j I :•_ ill I
丨 : — Country
As in the case of sales performance exhibited in Figure 2-1,Figure 2-2
illustrates the large variations in profit performance among sample companies.
, With reference to the average figure of 3.94 percent, firms in both Indonesia
and Malaysia suffered from considerable negative profit growth. The overall growth
range varies widely from -140.1 percent in the case of Indonesia to 59.45 percent in
the case ofTaiwan.
Variations in firm sales and profit growth among the five countries shed light
on the different performance consequences triggered by the Asian Financial Crisis
across countries. For example, in China and Taiwan, both firm sales and profits
actually increased during the crisis period. However, while firms in Indonesia and
Malaysia experienced increase in sales only, Hong Kong firms attained increase in
profits but a slight decrease in sales.
2 8
In light of the preceding comparison of the varied average sales and profit
performance across countries, examination of the average performance of firms within
a country helps provide insight to the overall business strength of each country in
question. To proceed, it is necessary to categorize all sample firms based on their sales
growth and profit growth standing.
Categorization ofFirms Based on Sales GrowtWrofit Growth Standing
Based on sales growth and profit growth standing, all companies can be divided
into four categories as illustrated in Figure 3 below:
Figure 3 Categorization Based on Sales Growth and Profit Growth Standing
+ve
Category 2 P^of't Category 4 ‘growth
-ve sales growth . 0 +ve sales growth
Category 1 -ve Category 3 profit
growth
Category 1 refers to a firm whose sales and profit growth figures are both
negative. Category 2 depicts those firms which, despite negative sales growth,
achieved a positive growth in profit. Those firms which suffered from negative profit
growth albeit positive growth in sales are labeled Category 3. The last category
29
consists of those firms which succeeded in attaining positive growth in both sales and
profit.
With reference to the performance of the entire sample of 488 companies, the
distribution of firms based on the categorization system aforementioned is presented in
Table 3 below.
Table 3 Distribution of Firms Based on Categorization of Sales Growth and Profit Growth Standing
pBWffffHW|B^fB^WBflHPPff |BWWpf8|* | f f fS | ! f f l f ] |^nffBf^ |WffMyWP!^BWI N % N % N % N % N % _
China 6 _20 8 "26.75 2 6.7 14 46.7 ~30 6.1 Hong K o i ^ 82 "37.3 21 _9.5 31 14.1 86 39.1 ~220 45.1 Indonesia 18 UT~ 29 ~4^4~ 2 2.9 21 30 70 14 M a l a y s i a ~ 17 _25 19 —27.9 - — - 32 — 47.1 68 13.9
, Taiwan 13 ^ 3 ~ 21 ^ 1 12 ~l2 54 54 100 20.5 Total 136 27.9 98 20.1 47 9.6 207 42.4 488 100
30
Figures 3-1 through 3-6 provide graphical representations of the distribution of
all categorized firms and those in individual countries based on Table 3.
Figure 3-1 Performance Of N\ Countries
np|l[iii,|, Category 1 > ^ ^ S | ^ 28%
Category 4 / ° ^ 42% ^ i ^ ^ ^ M
W p C ^ \ B ^ ^ Category 2
Category 3 ^0%
10%
The results show that an overwhelming 70 percent of all companies in the sample is
captured within categories 1 and 4. In other words, performance of firms in the sample
varies a great deal; from those which suffered the damage of negative growth in both
sales and profit to many which celebrated both positive sales growth and profit growth.
It is therefore worthwhile to look at performance of firms in each country for insights
to the variations.
3 1
Figure 3-2 Performance of China
Category 1 誦 jgj|j^ 20%
Category 4 _ | | | | _ | | | | _ ^ ^ B P ^ 46% I I ^ S i ^ H
響= Category 3
7%
In the case of China, it is observed that close to half of the firms are in Category 4.
Moreover, over a quarter of the firms enjoyed positive profit growth albeit negative
growth in sales.
Figure 3~3 Performance of HK
Category 4 ^ < ^ ^ ^ B |_||||||||_||||| Category 1 39% ^ ^ ^ M ^ ^ ^ 37% w
category 3 ⑶ = 2 14% 10%
For Hong Kong firms, a majority of them are polarized between Categories 1 and 4.
Besides, Hong Kong has the largest percentage of Category 3 and the smallest
percentage ofCategory 2 firms among all the five countries.
3 2
Rgure 3-4 Performance of Indonesia
Category 1 Category 4 ^ ^ | J | | ^ 26%
30% X B — k
/ L ^ ^ ^ ^ ^ H H
Category 2 ! s ^ ^ ^ ^ g ^ B 3 S B B m 3% ^ ^ ^ ^ ^ ^ ^ V
Category 2 41%
Over 70 percent ofthe Indonesian firms witnessed positive profit growth (Categories 2
and 4),although less than halfhad positive sales growth.
Figure 3-5 Performance of Malaysia
Category 1 ^ ^ raa>^ 25<½
厂_ Category 4 / ^ S M ^ a
47% J m ^ ^ | ^ m u w ^ ^ I S S ^ ^ ^ Category 2 Category 3 28%
0% —
Similar to the case of Indonesia, most firms in Malaysia saw growth in profit. 47
percent ofall firms had positive sales as well. In addition. Category 3 firms are virtually
non-existent in Malaysia.
33
Figure 3>6 Performance of Taiwan
Category 1 13%
r i _ — Category 4 i r ^ 8 B H ^1%
. 1 ^ ^
^ Category 3 12%
In Taiwan, over half of the firms attained positive growth in both sales and profit. This
is the highest percentage among all five countries. Despite the fact that over 30 percent
offirms suffered negative sales growth, the majority had positive growth in profit.
� The overall results show that an overwhelming 40 percent of the firms actually
did see both sales and profit growth albeit the Financial Crisis. A much smaller number
offirms (less than 30 percent) suffer negative growth in sales and profit. Performance
variations among countries are notable. While all countries except Indonesia exhibit a
dominance of firms with both sales and profit growth, Hong Kong witnessed the
highest percentage of firms with negative growth in sales and profit. Few firms
experienced sales growth accompanied by decrease in profit as illustrated by the
relatively low proportion of such firms in all countries (such firms are in fact non
existent in Malaysia). Over 40 percent of the Indonesian firms actually enjoyed profit
growth albeit decrease in sales.
Having looked into diversification scores and sales and profit performance, a
closer examination of the relationship between diversification and firm performance
3 4
involves studying the possible effect of market, product, and industrial diversification
on sales and profit growth. Using multiple linear regression, sales and profit growth are
analyzed in the subsequent pages as a function market, product, and industrial
diversification coupled with Sales 1997 and Profit 1997. The same functions are
generated without Sales 1997 and Profit 1997 figures for comparison.
! i
i
I
1 i 1
. !
..1 J
:i i 1 ':丨 I
i i. i
35
Sale
s G
row
th a
s a
Func
tion
ofM
arke
t Pr
oduc
t, In
dust
rial D
iver
sific
atio
n, a
nd 1
997
Sale
s an
d Pr
ofit
Tabl
e 4-
1 re
ports
the
B v
alue
s an
d sig
nific
ant T
val
ues
of th
e re
gres
sion
form
ula:
Sale
s gr
owth 二
Bo
+ Bi
* G
EO +
1¾*
DlV
pr^t
+ «3
* D
IV^^
,^^
+ B4
* sa
les9
7 +
B5*
prof
it 97
Dep
ende
nt V
aria
ble
: Sal
es G
rowt
h Va
riabl
e H
ong
Kong
Ch
ina
Mal
aysia
In
done
sia
Taiw
an
Tota
l B
val
ue
Sig
T B
val
ue
Sig
T B
val
ue
Sig
T B
val
ue
Sig
T B
val
ue
Sig
T B
val
ue
Sig
T
Geo
. 0.
2201
74
0.36
32
1.47
481
0.29
9 0.
1617
37
0.92
86
-0.3
5880
1 0.
8563
-0
.118
714
0.59
4 0.
3386
48
0.26
45
Div
p.
1.96
E-05
0.
9999
0.
0790
23
0.87
24
-0.2
8357
0.
6587
-0
.854
064
0.50
25
-0.2
8251
4 0.
1052
-0
.289
403
0.26
33
Div
i. 0.
1224
85
0.73
89 -
0.10
3340
3 0.
122
0.72
9687
0.
3555
2.
6313
2 0.
5061
-0
.427
589
0.37
27
0.52
8383
0.
2194
Sale
s97
1.28
E-05
0.
3066
7.
49E-
05
0.00
69
-1.1
5E-0
5 0.
8344
6.
77E-
08
0.00
05
-8.6
0E-0
7 0.
5638
7.
38E-
08
0
Prof
it 97
-1
.55E
-05
0.57
3 -2
.03E
-04
0.43
89
1.56
E-Q
4 0.
5335
8.
95E-
07
0.46
02
1.70
E-05
0.
2091
1.
03E-
06
0.04
13
Adj
uste
d R
2 -0
.013
95
0.22
385
-0.0
5202
0.
1846
9 0.
0093
1 0.
1989
3
F 0.
3976
2.
6727
8 0.
3374
4 4.
1261
1 1.
1860
5 25
.186
99
~^
?^
30
^ 70
100
488
36
Sale
s G
row
th a
s a
Func
tion
ofM
arke
t, Pr
oduc
t, In
dust
rial D
iver
sific
atio
n
Tabl
e 4-
2 re
ports
the
B v
alue
s an
d sig
nific
ant T
val
ues
of th
e re
gres
sion
form
ula:
Sale
s gr
owth
= B
o +
B"G
EO
+ 6
2* D
IV_u
ct +
B3*
DIV
^,^^
Dep
ende
nt V
aria
ble:
Sal
es G
row
th
Varia
ble
Hon
g Ko
ng
Chin
a M
alay
sia
Indo
nesia
Ta
iwan
To
tal
B v
alue
Si
g T
B v
alue
Si
g T
B v
alue
Si
g T
B v
alue
Si
g T
B v
alue
Si
g T
B v
alue
Si
g T
Geo
. 0.
2079
7 0.
3856
1.
8247
5 0.
2496
0.
0412
41
0.98
14
-1.1
3835
6 0.
5954
-0
.138
114
0.53
-0
.138
114
0.53
Div
p.
-0.0
2792
0.
9223
-0
.023
5M 0
.964
5 -0
.334
191
0.59
43
-1.4
9880
1 0.
275
-0.2
5673
8 0.
138
-0.2
5673
8 0.
138
Div
i. 0.
1036
33
0.77
66
-0.7
1043
3 0.
3265
0.
8430
67
0.26
68
8.82
7285
0.
0262
-0
.373
83
0.43
36
-0.3
7383
0.
4336
Adj
uste
d R
^ -0
.009
95
0.02
165
-0.0
2599
0.
0356
8 0.
0101
5 0.
0101
5
F 0.
2809
9 1.
2138
8 0.
4343
4 1.
8510
8 1.
3383
8 1.
3383
8
~^
2^
^ ^
70
m
m
37
Prof
it G
row
th a
s a
Func
tion
ofM
arke
t, Pr
oduc
t, In
dustr
ial D
iver
sific
atio
n, a
nd 1
997
Sale
s an
d Pr
ofit
Tabl
e 5-
1 re
ports
the
B v
alue
s an
d sig
nific
ant T
val
ues
of th
e re
gres
sion
form
ula:
Prof
it gr
owth
= B
o +
Bi*G
EO +
^*D
lV—
uet +
G3*
DIVi
dusu
+ ^
*sal
es97
+ B
5*pr
of1t
97
Dep
ende
nt V
aria
ble:
Pro
fit G
rowt
h Va
riabl
e H
ong
Kong
Ch
ina
Mal
aysia
In
done
sia
Taiw
an
Tota
l B
val
ue
Sig
T B
val
ue
Sig
T B
val
ue
Si^
T B
val
ue
Sig
T B
val
ue
Sig
T B
val
ue
Sig
T
Geo
. 1.
4898
38
0.39
09
3.48
0621
0.
6143
1.
0487
2 0.
5842
-0
.195
794
0.93
52
0.49
2227
0.
7538
0.
4922
27
0.75
38
Div
p.
1.55
0833
0.
4537
0.
8853
71
0.71
43
-0.2
3040
1 0.
7352
-1
.264
858
0.41
4 -1
.998
297
0.10
42
-1.9
9829
7 0.
1042
Div
i. 0.
4383
2 0.
9565
-8.
4492
25
0.01
34
0.35
4618
0.
6714
-1
.372
418
0.77
5 2.
5663
25
0.44
78
2.56
6325
0.
4478
Sale
s97
-3.7
5E-0
5 0.
6768
1.
54E-
05
0.90
25
-1.6
8E-0
4 0.
0054
9.
10E-
10
0.96
27
-1.3
3E-0
5 0.
2069
-1
.33E
-05
0.20
69
Prof
it97
6.36
E-05
0.
7472
9.
63E-
04
0.45
29
0.00
1184
0
7.09
E-06
0
1.33
E-04
0.
1657
1.
33E-
04
0.16
57
Adj
uste
d R
2 -0
.015
19
0.21
962
0.20
356
0.23
031
-0.0
0267
-0
.002
67
F 0.
3446
3 2.
6322
8 4.
4247
8 5.
1293
5 0.
9472
9 0.
9472
9
~^
220
^ ^
70
m
_m
38
Prof
it G
row
th a
s a
Func
tion
ofM
arke
t, Pr
oduc
t an
d In
dust
rial D
iver
sific
atio
n
Tabl
e 5-
2 re
ports
the
B v
alue
s an
d sig
nific
ant T
val
ues
of th
e re
gres
sion
for
mul
a:
Prof
it gr
owth 二
�+ Bi
*GEO
+ B
* D
IV^^
,,,+
B3*
DIV
,„,^
^
Dep
ende
nt V
aria
ble:
Pro
fit G
rowt
h Va
riabl
e H
ong
Kong
Ch
ina
Mal
aysia
In
done
sia
Taiw
an
Tota
l B
val
ue
Sig
T B
val
ue
Sig
T B
val
ue
Sig
T B
val
ue
Sig
T B
val
ue
Sig
T B
val
ue
Sig
T
Geo
. 1.
5497
71 0
.366
2 3.
9505
22
0.55
44
0.34
3631
0.
8735
-0
.138
425
0.95
99
0.18
2579
0.
7063
0.
1825
79
0.90
63
Div
p.
1.61
2386
0.4
317
1.41
5616
. 0.
5308
-0
.497
31
0.51
58
-1.9
5208
1 0.
2689
-1
.841
646
0.13
17
-1.8
4164
6 0.
1317
Div
i. 0.
1656
39 0
.949
5 -8
.638
412
0.00
83
1.05
0837
0.
2563
1.
5585
16
0.75
58
2.79
479
0.40
69
2.79
479
0.40
67
Adj
uste
dR2-
0.00
661
0.25
975
-0.0
2506
-0
.019
96
-0.0
0333
-0
.003
33
F 0.
5206
6 4.
3919
7 0.
4540
2 0.
5499
5 0.
8905
2 0.
8905
2
~^
??0
^ ^
70
m
m
3 9
Some observations become apparent in the regression findings in Table 4-1 and
Table 5-1. The following summarizes the major results:
(1) Table 4-1 Sales Growth as a Function of Market, Product, Industrial
Diversification, and 1997 Sales and Profit
• Geographical diversification has no significant impact on sales growth
• Product diversification has no significant impact on sales growth
• Industrial diversification has no significant impact on sales growth
• Sales growth increases with increase in Sales 1997 for China, Indonesia,and the
total sample
• Sales growth increases with Profit 1997 for the total sample
(V Table 5-1 Profit Growth as a Function of Market, Product, Industrial
Diversification, and 1997 Sales andProfit
• Geographical diversification has no significant impact on profit growth
• Product diversification has no significant impact on profit growth
• As industrial diversification increases, profit growth in China increases
• Profit growth increases with increase in Profit 1997 for Malaysia and Indonesia
Tables 4-2 and 5-2 which do not include Sales 97 and Profit 97 figures in the
regression fail to demonstrate the results above.
4 0
CHAPTER VI
DISCUSSION AND CONCLUSION
This study supplements Geringer's research (1989) in extending the scope of
MNC performance studies into the realm of international business using non-U.S.,
multi-country samples. In fact, it has been shown that the impact of diversification on
firm performance tends to vary across countries. Empirically, findings of the regression
functions performed in examining sales and profit growth for sample companies of the
five selected countries suggest that both sales and profit growth tend to increase with
� (1) less geographic diversification; (2) less industrial diversification, and (3) more
product diversification. In other words, Asian companies which possess these
diversification qualities are likely to have suffered relatively less damage during the
Financial Crisis.
Recall the four hypotheses proposed earlier in the study:
Hypothesis 1: Asianfirms investing more internationally tend to suffer less damage
during the Financial Crisis than those investing more in their home country.
Hypothesis 2: Asianfirms engaged in more product diversification tend to suffer less
damage during the Financial Crisis than those engaged in less product
diversification.
4 1
Hypothesis 3: Asian firms engaged in narrow industrial diversification tend to suffer
less damage during the Financial Crisis than those engaged in broad industrial
diversification.
Hypothesis 4: During the Financial Crisis, Asian firms investing in more
international markets, with more product diversification and narrow industrial
diversification suffered the least damage; those investing more locally, with little
product diversification and broad industrial diversification suffered the most
damage.
Results of the findings suggest that while Hypotheses 2 and 3 are confirmed,
Hypotheses 1 and 4 are rejected.
Hypothesis 1 is rejected based on the finding that Asian firms tend to suffer
less damage with less geographical diversification. One explanation is that in an
adverse business environment such as the Asian Financial Crisis, Asian firms may be
able to secure better sales and profit growth with market concentration instead of
spreading its resources across many geographical markets. As cited earlier,companies
can exercise the strengths of market specialization, economies of scale, greater market
knowledge, and a higher degree of control with market concentration. Hypothesis 4
also is rejected as a result of Hypothesis 1 being one of the conditions necessary to
satisfy the proof.
Rejections of some of the hypotheses reflect the fact that diversification
strategy pursued by Asian firms might not have functioned well as a stabilizer to offset
4 2
investment risks or as a means to attain economies of scope. As Khanna and Palepu
suggested, diversification in the Asian context may have been merely a response to
inefficiency in market mechanisms rather than a strategic action against it. As a result,
association between diversification and performance improvement is not apparent.
While the extent of diversification does not have a significant impact on firm
performance, size and profit level (sales 1997 and profit 1997) show significant
influence in firm performance in some countries. For example, large firms in China and
Indonesia tend to attain distinctively higher sales growth. In Malaysia and Indonesia,
profitable firms tend to achieve higher profit growth. Although not significant, there
exist positive relationships between profit 1997 and profit growth and other countries.
This evidence suggests that highly profitable firms have a better chance to continue
attaining higher profits.
Specifically in the case of China, profit growth increases as the DIVindustry
value diminishes. In other words, profif growth for sample companies in China
increases with industrial diversification.' This can be explained by the belief that the
impact of diversification in developing market such as China could be different from
that in advanced countries like the U.S. and the U.K. As a result of its developing
economy, Chinese companies may not have access to reliable and well established
suppliers or strategic partners. Hence, it is better for a company to diversify into
different industries and ancillary activities to support its own business.
4 3
Implications to Managers
Given the realization of the varied impact of diversification across countries
as demonstrated in this study, MNC managers, understanding of the implied level of
risk involved in diversification and performance variations becomes particularly
important in steering corporate strategies. As Reeb et al. (1998) pointed out, the
apprehension of risk (systematic risk) in an MNC is vital to the effective pricing of
equity, determination of the cost of capital, and project evaluation. If an international
project decreases the systematic risk of the firm, intuitively, it would seem that firms
would in tum use a lower discount rate to evaluate these projects (Reeb et al. 1998).
The decision, therefore, rests on how well managers are able to exploit diversification
characteristics specific to the firm or country in offsetting the risks involved.
Contrary to the popular belief that MNCs operating in multiple countries enjoy
diverse case flow retums sheltered from systematic market risk and hence will improve
performance (Shapiro 1978),findings examined in this study purport that Asian
companies benefit from the opposite. One explanation, as noted by Black (1990),is
that firms that go international are exposed to other risks such as that of foreign
exchange. If the foreign operations of an MNC are financed by domestic funds,
changing expectations about the value of the given currency do impact the value ofthe
firm,s foreign operations, and hence, the stakes of the company as a whole. By
practising market concentration, firms attempt to reduce their vulnerability to
additional risk factors such as exposure to foreign political and tax uncertainties which
increase the volatility of cash flows. Besides, with international diversification,
complications ofoverseas agency problem and asymmetric information also arise ^.ee
4 4
and Kwok 1988). The potential inability to monitor managers and to gather market-
specific knowledge because of geographical constraints and cultural differences,
coupled with the problems aforementioned, imply that diversification benefits cannot
be unambiguously accepted as the guarantee to systematic risk reduction. Hence, it
may not be unwise for companies to look into means other than diversification to
stabilize their investment returns.
The prosperity offree economy and international business development intensifies
the fierce global competition among enterprises. Stronger nations and business in
general have the comparative advantage over their weaker counterparts to ride on and
survive open competition. Much like what Nature has prescribed, "survival of the
fittest,,remains the rule of the game. The 1997 Asian Financial Crisis is perhaps yet
another onset for the battle of natural selection. It becomes apparent that unless
emerging Asian markets succeed in establishing a favorable macro environment with
reliable fundamentals and infrastructure, diversification in Asia may only be at best a
mere reaction to rather than a strategy against inefficiencies in market mechanisms.
The aftermath ofthe Crisis is for survivors to recuperate, rethink, and re-position their
corporate strategies to effectively tackle new challenges ofthe Millennium.
Further Research and Limitations
This study has taken a first step in examining the impact of diversification on
Asian firm performance across countries. Nevertheless, the generalization ofthe effect
of diversification on Asian companies can be better substantiated with further study
into companies of varied sizes and industries from countries in the Northern and
4 5
Southern Pacific regions, including Japan, Korea, Thailand, the Philippines, Singapore,
and India.
Limitations do exist in this study. Sample firms examined consist of varied
number of listed companies in Indonesia, Malaysia, and the Greater China region only.
The sheer size of these companies may imply rigidities that hinder the exploitation of
opportunities across industries and overseas. Further study into a comparable sample
size of smaller firms across more Asian countries will definitely contribute to further
insights. Another limitation is the time horizon of this study. While the Financial Crisis
spanned a matter of months, its repercussions are beyond limits. An extended period of
research will improve the understanding of the relationship between diversification and
firm performance in the Asian context.
4 6
Appendix 1 Mean Scores of GEO, DIVproduct and DIVindustry
geographic product industrial country diversification diversification diversification number (s3r} (££[} (sqr) China Mean .9919 .8993 .9383
N 30 30 30
Deviation 3.494E-02 .1532 .1129 Hong Mean .8576 4.3042 .9134 Kong N 220 220 220
pltiation '1836 38.7757 -1310 Indonesia~~~Mean “ .9590 54.1867 .9796
N 70 70 70 Std Deviation .1910 447.0449 9.177E-02
Malaysia Mean .9788 .8128 .8916 N 68 68 68 Std Deviation 5.870E-02 ^ 2 ^ .1657
Taiwan Mean .8782 4.7570 .9830 、 N 100 100 100
Std Deviation .1434 37.2634 6.628E-02
Total Mean .9015 10.8564 :~~.9357 N 488 488 488 Std. Deviation • 腳 172.0201 ^ ^ ^
4 7
Appendix 2 Average Sales Performance
Sales country revenue r6venue growth number ^ 1997 1996-97 China Mean 1715.700""""2024.767 .1503
N 30 30 30
pl1/iation 1429.221 1991.606 -2933 Hong Mean 3541.905~~3203.891~~-7.09E-04 Kong N 220 220 220
pltiation 5691.771 5429.269 .6464 Indonesia Mean 1203034 3278859 .6216
N 70 70 70
Deviation ^870883 19E+07 2.9261 Malaysia Mean 1834.265 1995.206 .1692
N 68 68 68
Deviation 1915.405 2134.183 .7746 Taiwan Mean 18604.820 20356.210 .1016
、 N 100 100 100
Aviation 28047.723 31549.202 .3058 Total Mean 178336.6~~476346.4 .1425
N 488 488 488
Deviation 819960_2 7202359 1.2452
4 8
Appendix 3 Average Profit Performance
profit country growth number PRETAX96 PRETAX97 (1996-97) China Mean 232.967 215.867 .1767
N 30' 30 30
Deviation 187.268 201.695 1.4356 Hong Mean 1044.164 962.945 .2946 Kong N 220 220 220
Deviation 2492.122 2468.680 4.6334 Indonesia~~Mean 168737.57~~17526.471 -1.4010
N 70 70 70 Q+H
Deviation 277258.03 267574.75 3.6585 Malaysia Mean ~~374.603 295.118 -.1803
N 68 68 68 Std Deviation 408.307 481.155 .9448
Taiwan Mean 1983.550 2309.720 .5945 、 N 100 100 100
Deviation 3211.577 3482.692 2.1433 Total Mean 25147.875 3475.855 3.943E-02
N 488 488 488' Std Deviation 119818.94 100910.07 3.6234
4 9
Appendix 7 Categorization of Firms based on Sales and Profit Growth Standing (By Country)
COUNTRY# country number by CATE_S category sales
CATE_S Page 1 of 1 Count 〃 —
Row Pct "0 or neg positive "ative growth Row 〃 0" 1〃 Total
COUNTRY# 、、、、、、、、、、、、、、、、•、、、、、、、、、、、、、、、、•、、、、、、、、、、、、、、、、> 1 “ 8 〃 22 “ 30
China 〃 26.7 〃 73.3 ‘‘ 6.1 g � � ” v \ � � � � � � ” \> • \ \�� \ \ v\ ” >\ \\ \\ >
2 〃 113 〃 107 〃 220 Hong Kong “ 51.4 ‘‘ 4 8.6 “ 45.1
s � � � � � � � � � � � � � � � ‘ • � � � � � � � � � � � � � � � � > 3 〃 20 〃 50 〃 70
Indonesia “ 28.6 ‘‘ 71.4 “ 14.3 s � � � � � � � � � � � � � � � � • � ‘ � ‘ � � � � � � � � � � � � >
4 〃 17 〃 51 〃 68 Malaysia '• 25.0 ‘‘ 75.0 " 13.9
s 、、 、、 、、 、、 、、 、、 、、 、、 •、、、、、、、、、、、、、、、、 > 5 〃 25 〃 75 〃 100
Taiwan " 25.0 “ 75.0 " 20.5
Column 183 305 488 Total 37.5 62.5 100.0
Chi-Square Value DF ‘ Significance
Pearson 33.12439 4 .00000 Likelihood Ratio 33.36736 • 4 .00000 Mantel-Haenszel test for 17.42933 1 .00003
linear association ^
Minimum Expected Frequency - 11.250
Number of Missing Observations: 0
5 0
Appendix 7 Categorization of Firms based on Sales and Profit Growth Standing (By Country)
COUNTRY# country number by CATE_P category profit
CATE_P Page 1 of 1 Count “ —
Row Pct 〃0 or neg positive "ative growth Row 〃 0〃 1〃 Total
COUNTRY# 、、、、、、、、、、、、、、、、•、、、、、、、、、、、、、、、、•、、、、、、、、、、、、、、、、> 1 〃 14 〃 16 〃 30
China 〃 46.7 〃 53.3 “ 6.1 s �� �� “ �� �� �� �� �� • � � � � � � � � � � � � � � � � >
2 〃 103 〃 117 〃 220 Hong Kong 〃 46.8 '' 53.2 '' 45.1
s � � � � � � � � � � � � � � � � • � � � � � � � � � � � � � � � � > 3 〃 47 〃 23 〃 70
Indonesia '' 67.1 “ 32.9 “ 14.3 s � ‘ � � � � � � � � “ � � � � • ' � � � � � � � \ � � � � ‘ � � >
4 〃 36 〃 32 〃 68 Malaysia “ 52.9 “ 47.1 “ 13.9
g \�N\ W��\\ \\ \\ \�• \\ \\ \\��W��\\��> 5 〃 34 〃 66 〃 100
Taiwan “ 34.0 “ 66.0 “ 2 0.5
, Column 234 254 488 Total 48.0 52.0 100.0
Chi-Square Value DF Significance 一 一 一 一 一 一 一 一 一 一 一 一 一 一 一 一 一 一 一 一 t
Pearson 18.94025 4 .00081 Likelihood Ratio 19.26069 4 .00070 Mantel-Haenszel test for 2.23458 . 1 .13495
linear" association
Minimum Expected Frequency - 14 . 385
Number of Missing Observations: 0
5 1
Appendix 6 Categorization of Firms based on Sales Growth and Profit Growth Standing
CATE_P category profit by CATE_S category sales
CATE_S Page 1 of 1 Count “
Row Pct "0 or neg positive 〃ative growth Row 〃 0〃 1〃 Total
CATE_P 、、、、、、、、、、、、、、、、•、、、、、、、、、、、、、、、、•、、、、、、、、、、、、、、、、> — 0 〃 136 〃 98 〃 234
0 or negative '' 58.1 “ 41.9 “ 4 8.0
1 〃 47 〃 207 〃 254 positive growth “ 18.5 ‘‘ 81.5 ‘‘ 52.0
Column 183 305 488 Total 37.5 62.5 100.0
Chi-Square Value DF Significance
Pearson 81.55556 1 .00000 Continuity Correction 79.87405 1 .00000 Likelihood Ratio 84.18484 1 .00000
、 Mantel-Haenszel test for 81.38844 1 . 00000 linear association
Minimum Expected Frequency - 87.750
Number of Missing Observations: 0 .
5 2
Appendix 7 Categorization of Firms based on Sales and Profit Growth Standing (By Country)
COUNTRY# country number by CATEGORY performance category
CATEGORY Page 1 of 1 Count 〃
Row Pct "cate__p=0 cate_p=0 cate_p=l cate_l=l “and cat and cat and cat and cat Row " 1" 2" 3" 4'' Total
COUNTRY# 、、、、、、、、、、、、、、、、•、、、、、、、、、、、、、、、、•、、、、、、、、、、、、、、、、•、、、、、、、、、、、、、、、、•、、、、、、、、、、、、、、、、> 1 " 6 " 8 " 2 " 14 '' 30
China “ 2 0.0 " 26.7 ‘‘ 6.7 “ 4 6.7 " 6.1 s � � � � � � � � � � � � � � � � • � � � � � � � � � � � � � � � � • � � � � � � � � � � � � � � � � • � � � � � � � � � � � � � � � � >
2 〃 82 〃 21 〃 31 〃 86 〃 220 Hong Kong “ 37.3 “ 9.5 " 14.1 “ 39.1 “ 45.1
gM、、、、、、、、、、、、、、.、、、、、、、、、、、、、、、、,、、、、、、、、、、、、、、、、,、、、、、、、、、、、、、、、、>
3 〃 18 〃 29 〃 2 〃 21 〃 70 Indonesia “ 25.7 “ 41.4 “ 2.9 “ 30.0 ‘‘ 14.3
s � � � � � � � � � � � � � � � � • � � � � � � � � � � � � � � � � • � � � � � � � � � � � � � � � � • � � � � � � � � � � � � � � � � > 4 ‘‘ 17 ‘‘ 19 ‘‘ “ 32 " 68
Malaysia " 25.0 “ 27.9 " “ 47.1 " 13.9 s � � � � � � � � � � � � � � � � • � � � � � � � � � � � � � � � � • � � � � � � � � � � � � � � � � • � � � � � � � � � � � � � � � � >
5 〃 13 〃 21 〃 12 〃 54 〃 100 Taiwan “ 13.0 " 21.0 “ 12.0 ‘‘ 54.0 “ 20.5
一� � \ \ � � ” \\ \\ V\�� ����W \\ \ \ � � � � � � \\ v\ \\ w \\ \\ \\�� \> \ \ � � � � � � � � \ � � 、 Column 136 98 47 207 488
Total 27.9 20.1 9.6 42.4 100.0
Chi-Square Value DF , Significance
Pearson 68.76305 12 .00000 Likelihood Ratio 76.34422 • 12 .00000 Mantel-Haenszel test for 7.58719 . 1 .00588
linear association
Minimum Expected Frequency - 2.889
Cells with Expected Frequency < 5 - 1 OF 20 ( 5.0%)
Number of Missing Observations: 0
5 3
BffiLIOGRAPHY
Books
Albaum, G., Strandskov, J., Duerr, E., and Dowd, L. International Marketing and Export Management. Addison-Wesley, New York, NY, 1989.
Asian Company Handbook 1999. Toyo Keizai Inc. 1998.
Beamish, Morrison, and Rosenzweig. International Management. Boston, MA: Irwin, 1997.
BETRO Trust Committee. Concentration on Key Markets. Royal Society of Arts, London, 1976.
Eiteman, D.K. and Stonehill, A.I. Multinational Business Finance. Addison-Wesley, Reading, MA, 1979.
Hasegawa, Keitarou. Asia No Higeki. Toyo Keizai Inc. 1998.
EVDR. How British and German Industry Export. Industrial Market Research Ltd., London, 1978.
ITI. Barclays Bank Report on Export Development in France. Germany, and the United Kingdom: Factors for International Success. Barclays Bank International, London, 1979. •
Piercy,N. Export Strategy: Markets and Competition. George Allen & Unwin, London, 1982.
Porter, Michael E. Competitive Advantage. Free Press, New York, 1985.
Rugman, A.M. International Diversification and the Multinational Enterprise. Lexington Books, Lexington, MA, 1979.
Rugman, A.M. Inside the Multinationals: The Economics of International Markets. Croom Helm, London,1981.
Rumdt,R.P. Strategy. Structure, and Economic Performance. Cambridge, MA: Harvard University Press, 1974.
5 4
Periodicals
Ayal, I. And Zif, J. “Market Expansion Strategies in Multinational Marketing." Joumal ofMarketing (Spring): pp. 84-94.
Barney, J.B. “Firm Resources and Sustained Competitive Advantage.,’ Joumal of Management 17 (1991): 99-120.
Black, F. "Equilibrium Exchange Rate Hedging." Joumal of Finance 45 (1990): 899-907.
Buhner, R. "Assessing International Diversification of West German Corporations." Strategic Management Joumal 8 (1987): 25-37.
Cavusgil, S.T. “On the Internationalization Process of Firms." European Research QSfovember): pp. 273-281.
Geringer, J.M.,Beamish, Paul W., and daCosta,R. "Diversification Strategy and Internationalization: Implications for MNE Performance." Strategic Management Joumal 10(1989): 109-119.
Hirsch, S. And Lev, B. "Foreign Marketing Strategies - A Note." Management International Review 9-6 (1973): 81-87.
Hitt, M.A., Hoskisson, R.E.,and Ireland, R.D. "A Mid-Range Theory of the Interactive Effects of International and Product Diversity on Innovation and Performance." Joumal ofManagement 20 (1994): 297-326.
Hitt, M.A., Hoskisson, R.E.,and Kim, H. "International Diversification: Effects on Innovation and Firm Performance in Product-Diversified Firms." Academy of Management Journal 40 (1997): 767-798.
Hoskisson, R.E. and Hitt, M.A. "Antecedents and Performance Outcomes of Diversity: A Review and Critique of Theoretical Perspectives." Joumal of Management 16 (1990): 461-509.
Hoskisson, R.E.,Hitt, M.A.,Johnson, R.A., and Moesel, D.D. “Construct Validity of An Objective (Entropy) Categorical Measure of Diversification Strategy." Strategic Management Joumal 14 (1993): 215-235.
Johanson, J. And Vahlne, J. E. "The Internationalization Process ofthe Firm - A Model of Knowledge Development and Increasing Foreign Market Commitments." Journal ofInternational Business Studies 8-1 (Spring/Summer 1977): 23-32.
Jones,G.R. and Hill, C.W.L. “Transaction Cost Analysis of Strategy-structure Choice." Strategic Management Joumal 9 (1988): 159-172.
Khanna, T., and Palepu, K. "Why Focused Strategies May Be Wrong for Emerging Markets." Harvard Business Review (July-August 1997).
5 5
Kim, W.C., Hwang, P., and Burgers, W.P. "Global Diversity Strategy and Corporate Profit Performance." Strategic Management Joumal 10 (1989): 45-57.
Kogut, B. "Designing Global Strategies: Profiting from Operational Flexibility." Sloan Management Review 26 (1985): 27-38.
Krugman, Paul. "Saving Asia: It's Time to Get Radical." Fortune 17 (September 1998): 33-38.
Lee, C. S. And Yang, Y. S. "Impact of Export Market Expansion Strategy on Export Performance." International Marketing Review 7-4 (1990): 41-51.
Lee, Kwang and Kwok, Chuck. "Multinational Corporations vs. Domestic Corporations: International Environmental Factors and Determinants of Capital Structure." Joumal ofIntemational Business Studies 19 (1988): 195-217.
Miller, J. And Pras, B. “The Effects ofMultinational and Export Diversification on the Profit and Stability ofU.S. Corporations." Southem Economic Joumal 46 (1980): 792-805.
Olugosa, S.A. “Market Concentration versus Market Diversification and Internationalization; Implications for MNE Performance." International Marketing Review 10 (1993): 40-59.
Prahalad, C. K. and Bettis, R.A. "The Dominant Logic: A New Linkage Between Diversity and Performance." Strategic Management Joumal 7 (1986): 485-502.
Prahalad, C. K. And Hamel, G. “The Core Competence of the Corporation” Harvard Business Review 68(3): 79-91.
Qian, Gongming. "Assessing Product-market Diversification of US Firms." Management International Review 37 (February 1997): 127-149.
Reeb,D.M., Kwok, C.C.Y., and Back, H.Y. "Systematic Risk of the Multinational Corporation." Journal of International Business Studies 29 (Second Quarter 1998): 263-279.
Sambharya, R. "The Combined Effect of International Diversification and Product Diversification Strategies on the Performance of U.S. Based Multinational Corporations” Management International Review 35 (1995): 197-218.
Shapiro, Alan. “Financial Structure and the Cost of Capital in the Multinational Corporation." Journal ofFinancial and Quantitative Analysis 13 (1978): 211-266.
Tallman,S. and Li, J. “Effects of International Diversity and Product Diversity on the Performance of Multinational Firms." Academy of Management Journal 39 (1996): 179-196.
56
Varadarajan, P.R . . "Product Diversity and Firm Performance: An Empirical Investigation." Journal of Marketing 50 (1986): 43-57.
Wan, C. C. "International Diversification, Industrial Diversification and Firm Performance of Hong Kong :MNCs." Asia Pacific Journal of Management 15 (1998): 205-217.
Wrigley, Leonard. "Divisional Autonomy and Diversification." Unpublished doctoral dissertation, Harvard University (1970).
"Report Card on Asia." BusinessWeek Asian Edition (November 1998): pp.16-21
i:..
i
1 t �.
! t
I .?'
.::〔..(. ‘ . • ^ : - . ‘ .
I .
I..
C U H K L i b r a r i e s
_ l _ l _ DD37DMSaS