Alessandri, Todd; Mammen, Jan; Weiss, Martin (2015)
The link between diversification and organizational risk has received a great deal of attention from scholars. However, much of the attention has focused on one theoretical perspective at a time and/or one type of diversification. In this study, we approach the phenomenon of diversification from a broader perspective, integrating multiple theories to understand the implications of both business and geographic diversification on organizational risk. We explore the theoretical similarities and differences between business and geographic diversification, in terms of risk effects. Specifically, we examine arguments from the resource- based view and bounded rationality to explain the risk effects of both business and geographic diversification. In addition, we explore the impact of the liability of foreignness on the geographic diversification--risk linkage. We then integrate these theoretical implications to form testable hypotheses. We suggest that, while these two forms of diversification share some similarities, their differences, from a theoretical perspective, result in differing risk profiles. We then empirically test these hypotheses using a panel dataset of S&P 500 firms. We find partial support for our hypotheses, with business diversification having a negative effect on our two measures of organizational risk, while geographic diversification has a positive effect on both risk measures. Finally, we find interaction effects of both forms of diversification on our two risk measures, although only when business diversification is decomposed into its related and unrelated components.
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