International diversification measurement: The consideration of international involvement and diversity in global strategic planning
Three broad questions were addressed in this study. First, should management consider the diversity in a firm's international operating environment when planning further international diversification? Second, why does the diversity factor deserve consideration? Third, how does one measure the amount of diversity in a firm's international operating environment? The objectives of this study were: (1) the introduction of the diversity construct into the measurement of international diversification, and (2) to obtain a better understanding of the relationships between international involvement, international diversity, and profit performance.
To reach these objectives, four relationships were investigated: (1) the relationship between the level of international involvement and the level of international diversity, (2) the relationship between international involvement and profit performance, (3) the relationship between international diversity and profit performance, and (4) the relationship between international diversity and profit performance while controlling for the level of international involvement.
International diversification was measured by gauging two factors: (1) the firm's degree of international involvement and (2) the firm's degree of international diversity. A firm's degree of diversity was measured as the sum of the home/host differences and the host/host differences using Hofstede's country specific index of differences in work-related values. The relationships between levels of international diversification and levels of profit performance were examined for 310 US manufacturing firms for a five-year period (1986-90).
A significant and positive correlation between involvement and diversity was found. There was no significant difference between the influence of involvement or diversity on profit performance. Diversity had a negative relationship to profit performance in low involvement firms and a positive relationship to profit performance in highly involved firms. It appears that larger, more internationally involved firms are better prepared to handle higher levels of diversity in their international operating environments. When operations in diverse international environments are attempted by firms with low international involvement, profit performance appears to suffer. When operations in more diverse international environments are attempted by firms with higher levels of international involvement, profit performance is likely to improve. Strategists should measure and evaluate both involvement and diversity to gain a fuller picture of a firm's level of international diversification.