Spanning political and cultural boundaries: Diversification, internal capital market and performance

Abstract

We augment diversification and internal capital market (ICM) frameworks with an institutional perspective, arguing that the effect of diversification on performance is dependent not only on the specific type of diversification (international or industry) but also on the specific context of a company in terms of its home market and the heterogeneity of its international investments. We believe the value of diversification is contingent on the distances between markets of a firm and we assume that different types of distance (economic, political, financial and cultural) have different effects on firm performance. Our findings suggest that industry diversification has a negative effect on MNE performance, but ICM may be used to counter this effect, especially in times of economic downturn in the domestic market. The effect of international diversification is insignificant and depends on the specific context of a company’s portfolio of international investments. In an exploratory attempt, we find that a politically heterogeneous portfolio of investments may result in a negative performance, whereas cultural distance seems to spur economic performance of the MNE.