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