產品多樣性、人力資本及公司績效：理論與實證 - 政大學術集成

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(1)Product Diversity, Human Capital of Board and Block Shareholders, and Firm Performance: Theory and Evidence. by Chien-Hui CHUANG Under the supervision of Professor Anne WU. 立. 政治大. ‧. ‧ 國. 學 er. io. sit. y. Nat. A dissertation submitted in partial fulfillment of the requirement for the degree of. n. a l Doctor of Philosophy i v C h(Accounting) U n engchi. Department of Accounting College of Commerce National Chengchi University June, 2015.

(2) Abstract Diversification has been discussed for a long time. Diversification is a popular strategy for firms to build competitive advantage. However, the empirical results on the relationship between diversification and firm performance are conflict. The purpose of this dissertation is extending the prior theoretical framework and empirical studies to establish a research framework for the influence of diversity on firm performance under an emerging market. In emerging markets, firms implement. 政治大 focuses on the influence of product diversity on firm performance in emerging 立 product diversification easier than other types of diversification. This dissertation. markets. Moreover, this study also investigates what moderators affect firms’ ability. ‧ 國. 學. to reap the benefits while decreasing the cost from complicity and risk of product. ‧. diversity. Product diversification is one of strategic decisions for firms. The. sit. y. Nat. formulation of strategies and decision making is complex and relies on knowledge. io. er. structure in firms. Thus, human capital of decision makers would be a key factor in the relationship between product diversity and firm performance. The human capital. al. n. v i n C h a lot in literature.UTop managers have cognitive of top managers has been discussed engchi limitations on strategic decision, so they would like to search advice and information for others. Board of directors and block shareholders play important roles in strategic decision. Therefore, this study discusses the role of human capital of board and block shareholders in the relationship between product diversity and firm performance. This study uses electronic industry in Taiwan as research samples and empirically tests the research hypotheses. The results provide a more comprehensive view of product diversity and firm performance among an emerging market.. I.

(3) The empirical results support the argument that product diversity is not always positively related to firm performance. Because of the imperfections in capital, products, and managerial talent, the costs of product diversity is higher than benefits in emerging markets. In addition, firms’ human capital is helpful for firms to overcome the uncertainty and risk of product diversity. Board’s industry experience and top management experience bring a short term benefit on firm performance under high product diversity. On the other hand, block shareholders’ industry experience brings benefit on firm performance under high product diversity after a long period.. 立. 政治大. Keywords: Product Diversity, Human Capital, Board’s Experience, Block. ‧ 國. 學. Shareholders’ Experience, Firm Performance, Moderating Effect.. ‧. n. er. io. sit. y. Nat. al. Ch. engchi. II. i n U. v.

(4) Table of Contents Chapter 1: Introduction .................................................................................................. 1 1.1 Research background and motivation .............................................................. 1 1.2 Research purposes and research questions ...................................................... 7 1.3 Significance of the research ........................................................................... 10 1.4 Research framework ...................................................................................... 13 Chapter 2: Literature review ........................................................................................ 16 2.1 Literature review of diversification strategy.................................................. 16 2.1.1 Resource-based view .......................................................................... 29 2.1.2 Governance view ................................................................................ 32 2.2 Literature review of human capital and experience ....................................... 38 2.2.1 Board human capital ........................................................................... 40. 政治大 2.2.2 Board multi appointment and board experience ................................. 46 立. Chapter 3: Theory and hypotheses development ......................................................... 55. ‧ 國. 學. ‧. 3.1 Context of study ............................................................................................. 55 3.2 Product diversification strategy ..................................................................... 56 3.3 Experience ..................................................................................................... 59 3.3.1 Experience of boards.......................................................................... 60 3.3.2 Experience of block shareholders ...................................................... 64 3.4 Hypothetical research framework .................................................................. 67. er. io. sit. y. Nat. Chapter 4: Research methodology ............................................................................... 68. n. al. Ch. i n U. v. 4.1 Conceptual framework................................................................................... 68 4.2 Research sample and data collection ............................................................. 69 4.3 Variable measurement ................................................................................... 71 4.4 Data analysis methods ................................................................................... 78. engchi. Chapter 5: Empirical results......................................................................................... 82 5.1 Fundamental results ....................................................................................... 82 5.2 Regression analysis ........................................................................................ 85 5.2.1 The influence of product diversity on firm performance .................... 85 5.2.2 The moderating role of board’s experience ........................................ 88 5.2.3 The moderating effect of block shareholders’ experience .................. 97 5.3 Additional analyses ...................................................................................... 101 5.3.1 Sensitivity analysis for board’s industry experience ........................ 101 5.3.2 Additional analysis for geographic diversification ........................... 105 III.

(5) Chapter 6: Conclusions .............................................................................................. 115 6.1 Conclusions and implications ...................................................................... 115 6.2 Research limitations ..................................................................................... 118 6.3 Future research ............................................................................................. 119 References .................................................................................................................. 122 Appendix A: Index of Electronic Sub-industry ......................................................... 130. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. IV. i n U. v.

(6) List of Figures Figure 1: Research framework of this study ................................................................ 15 Figure 2: Hypothetical research framework of this study............................................ 67 Figure 3: The sample of board’s industry experience measurement ............................ 73 Figure 4: The sample of block shareholders’ industry experience............................... 74 Figure 5: The effect of board’s industry experience and diversification on firm performance ................................................................................................... 92 Figure 6: The effect of board’s top management experience and diversification on. 政治大 Figure 7: The effect of block 立shareholders’ industry experience and diversification. firm performance ........................................................................................... 96. ‧. ‧ 國. 學. on firm performance .................................................................................... 100. n. er. io. sit. y. Nat. al. Ch. engchi. V. i n U. v.

(7) List of Tables Table 1: Literature summary of diversification strategy .............................................. 17 Table 2: Literature summary of board human capital .................................................. 43 Table 3: Literature summary of board multi appointment and board experience ........ 49 Table 4: Variable measurements for this study ............................................................ 77 Table 5: Descriptive statistics ...................................................................................... 83 Table 6: Correction matrix among dependent variables and independent variables.... 84 Table 7: Testing the influence of product diversity on firm performance.................... 86. 政治大 performance ................................................................................................... 90 立. Table 8: Testing the moderating effect of board’s industry experience on firm. ‧ 國. 學. Table 9: Testing the moderating effect of board’s top management experience on firm performance ........................................................................................... 94. ‧. Table 10: Testing the moderating effect of block shareholders’ industry experience. sit. y. Nat. on firm performance ...................................................................................... 98. n. al. er. io. Table 11: Testing the moderating effect of board’s industry experience by the. i n U. v. average numbers of sub-industry on firm performance ............................... 103. Ch. engchi. Table 12: Testing the influence of geographical diversity on firm performance ....... 107 Table 13: Testing the moderating effect of board’s industry experience on the relationship between geographical diversification and firm performance .. 109 Table 14: Testing the moderating effect of board’s top management experience on the relationship between geographical diversification and firm performance ................................................................................................. 111 Table 15: Testing the moderating effect of block shareholders’ industry experience on the relationship between geographical diversification and firm performance ................................................................................................. 113 VI.

(8) Chapter 1: Introduction 1.1Research background and motivation Diversification is a popular strategy in business. Diversification is defined as the expansion of involvement in more factor and product markets through internal business development or acquisition (Palich et al. 2000; Nath et al. 2010). Diversification is one significant strategy for firms to maintain competitive advantage and increase their operational performance (Chen and Yu 2012). Diversity creates. 政治大. value for firms through scale of economies or market power (McDonald et al.. 立. 2008; Rumelt 1982). There are two major types of diversification which are product. ‧ 國. 學. diversification and geographic diversification (Geringer et al. 2000; Qian et al. 2008; Denis et al. 2002). Product diversification means extend produce or sales in. ‧. Nat. sit. is selling similar product in new markets (Geringer et al. 2000).. y. different product areas (Rumelt 1982). On the other hand, geographic diversification. n. al. er. io. Diversification strategy is critical for firm operations especially in emerging. i n U. v. markets. The immature industries and less-developed capital market in emerging. Ch. engchi. markets offer firms large opportunities and benefits to engage in diversification strategy (Chen and Ho 2000; Delios et al. 2008). Furthermore, the environment of emerging markets is insufficient and uncertain. Therefore, firms in emerging markets usually find benefit from higher levels of product diversity. Emerging market firms like to pursue product diversification more than other types of diversification. Firms implement product diversification by using the existing rent-generating resources of the firm and generate economies of scope to earn profit. Using existing resources make firm diversify into other products easier than diversification into different geographic areas. On the other hand, product diversity helps emerging market firms to 1.

(9) cover the weakness of external capital markets by creating internal financial economies. For example, internal financial economies may compensate for inadequate external capital markets by allocating resources among internal business units more efficiently (Wan and Hoskisson 2003; Hill and Hoskisson 1987). Product diversification is motivated by searching for better growth prospects and higher performance (Bettis 1981; Chen and Yu 2012). In addition, the political and other relationship becomes important in emerging markets because of the high structural uncertainty. Political relation helps firm achieve more institutional support. Relation. 政治大 diversity build from connect with other firms helps emerging market firms to leverage 立. with other firms increases interfirm resource exchanges (Luo 2003). The product. new businesses. In conclusion, product diversity is the most important types of. ‧ 國. 學. diversification for firms in emerging markets. Therefore, this study focuses on. ‧. discussion the influence of product diversification in an emerging market.. sit. y. Nat. In recent years, many researchers discuss the relationship between diversification. io. er. and firm performance. However, those studies have conflicting results. Some studies highlight that diversification have positive impact on firm performance by increasing. al. n. v i n Cinhaddition to the reasons debt capacity and risk reduction, I highlighted above (Wan engchi U. and Hoskisson 2003; Nath et al. 2010; Stern and Henderson 2004). Moreover, based. on the resource-based view, diversification brings firms economies of scale by allowing them to better leverage various resources, including tangible and intangible resources (Tanriverdi and Venkatraman 2005). On the other hand, some researchers suggest that diversification may destroy firm value and firm performance (Comment and Jarrell 1995; Denis et al. 2002). The cost of diversification is high because of the high business environment uncertainty and volatility resulting in the lack of information (Hill and Hoskisson 2.

(10) 1987). These negative findings show that firms find it is difficult to reap the diversity as theorized by resource-based view. Therefore, this study investigates what moderators affect firms’ ability to reap the benefits while decreasing the cost from complexity and risk. I argue that it depends on the diversity of human capital the firm has. Product diversification is one types of strategic decision. Shrivastava and Grant (1985) recognize whether a decision is strategic from the using of organizational resource, diversity of expert, influencing by external environment agents and. 政治大 decisions. Organizational decision making is complex and rely on knowledge about 立. restructuring organization. Product diversification satisfied these criteria for strategic. the environment. However, decision makers usually face incomplete information. ‧ 國. 學. about the uncertain environment. Under this complex situation, decision makers are. Professional knowledge is. sit. y. Nat. competitive environment (Carpenter and Westphal 2001).. ‧. expected to rely on any knowledge it can access about corporate strategy and the. io. er. important in decision making especially in product diversity. High product diversified firms produce and sale many different types of product. Product diversification. al. n. v i n requires firms to have extensiveCknowledge about new h e n g c h i Uproduct development (Nath et al. 2010). Kor and Leblebici (2005) address that the key point of success in. implementation of diversification strategy is the management of strategic human capital. Professional knowledge and resource is important especially in emerging markets. Because of the large imperfections in capital, products, and managerial talent, emerging markets usually have no market data, nonexistent or poorly developed distribution systems, relatively few communication channels (Arnold et al. 2012). One of the key resources of firm operations is process-related knowledge such as technological and operational know-how. Firms that learn these knowledge quickly 3.

(11) and effectively will create value for their businesses (Guillén 2000). Hence, institutional knowledge and resource is important in emerging markets. Knowledge and information are factors in human capital of a firm. Human capital is competencies, tacit experience, and overall knowledge-base of individuals in an organization (Bontis and Serenko 2009). Human capital in a firm is thus a source of critical competitive advantage. Human capital is a set of knowledge and skills that develop through education, training, and various experiences (Coleman 1988; Coff 2002). Individuals accumulate ability and knowledge from education and experience.. 政治大 related knowledge of operating strategy and best practices in the industry. Human 立 For organizations, experience in industries or learning from other firms provide the. capital of a firm is a bundle of human capital of each members in that firm, such as. ‧ 國. 學. employee, managers etc. This study discusses the role of human capital in product. ‧. diversification. As previously highlighted, product diversification is one of strategic. io. er. makers in firms influence firm performance.. sit. y. Nat. decisions in firms. This study focuses on discussion of how human capital of decision. The key person of decision making in firms usually is top manager. Top. al. n. v i n C h feedback andUmaking the executive decisions managers are responsible for soliciting engchi. for the firms, communicating this decision to others, and monitoring strategy adoption (Simon 1987). However, the strategic decisions related to large amounts of organizational resources and implement through appropriate means. Top managers sometimes cannot handle the complexity in the process of strategic decision making. There are cognitive limits to information processing by individual managers (Shrivastava and Grant 1985). Therefore, top managers usually search relevant information or suggestion from others. Beside top management, board of directors and block shareholders also has influence on firm decision making. Board and 4.

(12) shareholders are not engaged in the day to day operations. In comparison to managers, directors and shareholders exercise relatively little independent influence over the firm’s strategic direction (Westphal and Fredrickson 2001). The support from the board of directors and shareholders are critical in the functioning of a firm. Prior research has looked at the role of board’s experience in firm’s strategic decision making. However, limited prior research has looked at the experience of block shareholders as a source of advice and information. Drawing on prior research on learning from experience and others’ knowledge (Carpenter and Westphal. 政治大 experience of the board of directors and block shareholders influence firms’ strategy, 立. 2001; Johnson et al. 2013; Platt and Platt 2012; Wu et al. 2013), I argue that the. especially firm decisions related to diversification.. ‧ 國. 學. The board of directors is appointed to oversee the activities of firms and to give. ‧. managers some advice on day to day affairs. One of the tasks served by the board of. sit. y. Nat. directors is to provide advice and consultation to managers on matters related to firm. io. er. operations, which means that one of the role of the board is involvement in strategy formulation (Salancik and Pfeffer 1980; Hoitash 2011; Nicholson and Kiel. al. n. v i n C h There is growingUdiscussion on how boards add 2007; Carpenter and Westphal 2001). engchi value to the firms. Researchers found that boards can add value by reviewing key firm. decisions, providing advice in the strategy formulation process, consulting for the management, and even bringing key information about industry contacts (Nicholson and Kiel 2004; Daily et al. 2003; Golden and Zajac 2001). Boards affect firm diversification not only by directly influencing the formulation of diversification strategy but also via indirect influence through their role as “sounding boards for management” (McNulty and Pettigrew 1996; Westphal and Fredrickson 2001; Jensen and Zajac 2004). Board of director is the bridge 5.

(13) between the firm and industry. Directors are expected to bring access to important resource outside the firm, as channels of communication between the firm and the environment, and then help firm in strategy formulation (Haynes and Hillman 2010). When boards deal with complex strategic decision making tasks, they will rely upon their own knowledge which related to business environment (Carpenter and Westphal 2001). Directors usually build their related knowledge from experience in similar roles. Nicholson and Kiel (2004) address that director increase firm performance by using their intellectual capital. A bundle of intellectual of director is also known as. 政治大 Based on board capital theory, the assessment of. board capital. Board capital support directors executive their role in firm operation and influence firms’ behavior.. 立. board ability in the form of board capital is an important issue (Tian et al. 2011). The. ‧ 國. 學. major components of board capital are directors’ human capital and social capital. ‧. (Johnson et al. 2013). Boards’ human capital is a part of board capital and is a. sit. y. Nat. popular issue in corporate governance research. Human capital of directors refers to. io. er. the skills and experiences that individual directors bring to the decision-making process. To influence the decision making process, they bring knowledge of industry. al. n. v i n C hin a domain area and and specific task. Board expertise familiar with specific events engchi U. through prior top management experience, such as being CEO (Johnson et al. 2013). Therefore, directors’ knowledge of industry and its business environment is critical for firm operations. Directors accumulate industry knowledge and gain information of competitors from their experience through appointment by other companies or from prior top management experience. As for block shareholders, shareholder activism provides a channel for shareholders to closely monitor and provide advice to management, which can be helpful in the promotion of firms’ long-term performance (Gillan and Starks 2000). 6.

(14) Shareholders are firms’ primary stakeholders and who are owners of the firm (O'Rourke 2003). As owners of the firm, shareholders care about the performance and profitability. The power and influence of shareholders in firm operation is significant. Shareholders usually monitor and affect firm strategy by shareholder activists. Shareholder activism is defined as shareholders influence on firms’ behavior by claiming their power as owners of firms. Shareholders play their monitor and advise role of firm business activities through both formal and informal activisms. Formal shareholder activism refers to public attempts to influence the firm, through public. 政治大 attempts to change the stock price by buying and selling stocks. Informal activism 立. shareholder proposals, actions in the annual meetings, active lobbying of votes, and. attempts are not publicly visible, but take place behind the scenes, through actions. ‧ 國. 學. such as corporate engagement, and private negotiations and dialogue with managers. ‧. (O'Rourke 2003; Nordén and Strand 2011). Colpan et al. (2011) address that the. sit. y. Nat. characteristic preferences of shareholders have influence on product diversification. io. er. and then impact firm performance. According to learning theory, experienced investors accumulate investment knowledge and make better investment decisions. al. n. v i n (Korniotis and Kumar 2011). C The knowledge fromU h e n g c h i their investment experience is helpful in their industry evaluation and market predictions (Delios and Henisz. 2003; Tuschke et al. 2014). With this knowledge, block shareholders can potentially provide valuable advice to managers about market and industry trends, which is valuable for making diversification related strategic decisions.. 1.2 Research purposes and research questions Diversification is critical for firms to build their competitive advantage. However, related research found conflict results in the relationship between diversification and 7.

(15) firm performance which needs further examination. In order to find the clear evidence, this study examines the relationship among diversification under a specific environment – an emerging market. The purpose of this study is to investigate what moderators affect firms’ ability to reap the benefits of diversification while decreasing the costs inherent from high product diversity. In particular, I focus on how human capital of two key external parties with significant influence on a firm’s strategy – the board of directors and shareholders. Board and block shareholders play critical roles in affecting the balance. 政治大 on the role that human capital of directors and shareholders play in moderating the 立. between benefits and cost related to a firm’s diversification decision. Hence, I focus. effect of product diversification on firm performance.. ‧ 國. 學. I focus on two types of experience of the board of directors – industry experience. ‧. via multiple board appointments and prior experience as a top management in another. sit. y. Nat. firm. Multiple board appointments provide directors a chance to accumulate more. io. er. knowledge about an industry or company. It is a channel for firm to observe the behavior of other firms and learn from best practices and mistakes made by other. n. al. Ch. firms (Borgatti and Foster 2003). Membership. engchi. v i n Uin multiple. directorates is a. communication channel between the firm and external organizations, which provide useful information for strategic decision making and firm operations (Kor and Sundaramurthy 2009).. Multiple board appointment helps firms to know other firms’. behavior and to reduce the uncertainty related to strategic activities. Firms identify emerging strategies, obtain information of new strategies and learn how to implement strategies through directors (Connelly et al. 2011; Borgatti and Foster 2003). Thus, this study focus on board’s industry experience via multiple board appointments. Directors’ experience acquired by their direct involvement as the top management 8.

(16) of other firms is also another key source of knowledge and experience that directors will draw upon to give advice to the focal firm as they make strategic decisions (Westphal and Fredrickson 2001). Directors’ prior top management experience provides knowledge of decision making as a manager which is helpful in operating strategy decision making. With experience of being top manager, directors can put themselves in top managers’ shoes and provide useful advice. Shareholders with large investment in a firm (block shareholders) have significant power on a firm’s governance and management decisions. Managers are more likely. 政治大 Sandino 2009). Moreover, block shareholders with large investment portfolios have 立. to be responsive to these salient shareholder groups (David et al. 2007; Ferri and. more incentive to expend resources in monitoring a firm’s management and to show. ‧ 國. 學. more care about a firm’s strategic direction (Smith 1996; Gillan and Starks 2000).. ‧. When firms operate under uncertain and complex environments, they may search. sit. y. Nat. for external information (Kor and Sundaramurthy 2009). Therefore, I expect the. io. er. knowledge from board’s experience and block shareholders’ experience help firms to cope with the benefits while face the complexity and risk of making strategic and. n. al. i n operational decisions related to C product diversification. hengchi U. v. I thus examine the following research questions: 1.. Does product diversification affect firm performance?. 2.. Does board’s industry experience bring benefits to the firm by enhancing the relationship between product diversification and firm performance?. 3.. Does board’s prior top management experience bring benefits to the firm by enhancing the relationship between product diversification and firm performance?. 4.. Does block shareholders’ industry experience bring benefits to the firm 9.

(17) by enhancing the relationship between product diversification and firm performance?. 1.3 Significance of the research This study contributes significantly to both academia and practice: 1. Contributions to academia: (1). Diversification studies find conflicting results in determining whether the relationship between diversification and firm performance is positive or. 政治大 on firm performance under a specific environment, which is emerging 立. negative. This study investigates the influence of product diversification. market. The results show that product diversification negatively relates to. ‧ 國. 學. firm performance in emerging markets. This may be caused by the. ‧. imperfections in capital, product, and managerial talent among emerging. sit. y. Nat. markets. Highly diversified firms face more risk in the market and are. io. While a diversification strategy may have negative influence on firm. al. n. (2). er. more likely to face increased costs in emerging markets.. performance in. v i n C h markets, product emerging diversification engchi U. has distinct. advantages and is one of the critical strategies used by firms to create their competitive advantage. Thus, it is important to examine how firms can enhance the benefits of product diversification and decrease the costs inherent in the strategy. Therefore, I investigate what moderators affect firms’ ability to reap the benefits while decreasing the costs arising from the increased complexity and risk inherent in the diversification strategy. I examine the moderating role played by board’s and block shareholders’ experience in moderating this relationship. The moderating role of the 10.

(18) human capital from external stakeholders has yet to be examined in the diversification. literature.. Overall,. this. study. contributes. to. the. diversification literature in prove the negative impact of product diversification on firm performance in emerging markets and highlighting that human capital of key external stakeholders have a significant moderating effect on the relationship between product diversification and firm performance. This study discuss three types of human capital in a firm, which are. 政治大 shareholders’ industry experience. 立. board’s industry experience, board’s prior top management experience, and block. Literature of board’s. experience discusses board’s experience in join in specific task or in one. 學. ‧ 國. industry (Johnson et al. 2013; Tian et al. 2011), but few of them discuss. ‧. the diversity industry experience of directors. I integrate the concept of. sit. y. Nat. board multi appointment to measure board’s industry experience. Board multi appointment is a director from one firm sits on the board of directors. io. er. (3). of another firm. Prior research on board tended to examine the influence of. al. n. v i n C hfirms from boardU multi between engchi. relationships. appointment. Limited. research has examined the industry experience that board members bring through their membership on multiple boards. This concept is new in human capital research.. On the other hand, this study also discusses the. benefit of block shareholders’ experience. To the best of my knowledge, this study is the first to analyze the impact of block shareholders’ industry experience on firm operation in addition to the experience and contributions of the board of directors. I measure the industry experience of block shareholders from their investment experience. Related study 11.

(19) discusses investors’ investment experience (Switzer and Huang 2007). However, the investment experience is focus on their knowledge and skill in investment. This study discuss the experience of investment in other industries but address that the industry knowledge and resource would be benefit to firms. This is a new sight in human capital literature. 2. Contributions to practice: (1). This study provides further evidence that firms do not always benefit from product diversification strategy, especially in emerging markets. Both the. 政治大 But this does not mean that firms should not pursue this strategy, as there 立. cost and uncertainty of pursuing a product diversification strategy are high.. are distinct benefits of this strategy highlighted in the literature. This study. ‧ 國. 學. provides insights and guidance to firms about how they might moderate. This study shows that not only top manager is the key strategic decision. sit. y. Nat. maker in firms but board of directors and block shareholders are also play. io. er. (2). ‧. the negative effects of pursuing a product diversification strategy.. important roles in strategic decision making. Moreover, the experience of. al. n. v i n directors and block C shareholders play important roles in affecting firm hengchi U decision making. Directors and block shareholders generate relevant knowledge from their experience as managers, directors and shareholders of other firms and such knowledge can be highly applicable to a firm seeking advice about how they might effectively pursue a product diversification strategy. The research results may have an important application for practitioners. Firms can improve their performance by hiring directors with substantial industry and executive experience and attracting the investment from those shareholders with different industry 12.

(20) experience.. 1.4 Research framework The remainder of this study is organized as follows and the framework of this study is depicted in Figure 1: Chapter 2: Literature review I review theoretical and empirical findings in related literature. First of all, this section shows the definitions, the benefits, and the damage of diversification. Second,. 政治大. I review the related papers of human capital and experience especially from the view. 立. Chapter 3: Theory and hypotheses development. 學. ‧ 國. of corporate governance.. er. io. sit. y. Nat. markets and develops empirical hypotheses.. ‧. This section presents institutional background of product diversification in emerging. Chapter 4: Research method. n. al. This section describes. v i n theCconceptual framework, h e n g c h i U research. sample, variables. measurement, and data analysis methods.. Chapter 5: Empirical results This section discusses the findings of the influence of product diversification on firm performance. I also examine the results of the moderating effect of board’s and block shareholders’ experience on the relationship between product diversification and firm performance. In addition, this study presents robust analysis on different measurement of experience and additional test on geographic diversification. 13.

(21) Chapter 6: Conclusions I conclude by reviewing the related literature and by my finding in analysis. This section also provides the research limitations and future research.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. 14. i n U. v.

(22) Chapter 1: Introduction 1.1 Research background and motivation 1.2 Research purposes and research questions 1.3 Significance of the research Chapter 2: Literature review 2.1 Literature review of diversification strategy 2.2 Literature review of human capital and experience. Chapter 3: Theory and hypotheses development 3.1 Context of study 3.2 diversification strategy 3.3 Experience 3.3.1 Experience of board 3.3.2 Experience of block shareholders. 立. 政治大. ‧ 國. 學 ‧. Chapter 4: Research methods 4.1 Conceptual framework 4.2 Research sample and data collection 4.3 Variables measurement 4.4 Data analysis methods. n. er. io. sit. y. Nat. al. Ch. i n U. Chapter 5: Empirical results 5.1 Fundamental results 5.2 Regression analyses 5.3 Robust analyses. engchi. v. Chapter 6: Conclusions 6.1 Conclusions and implications 6.2 Research limitations 6.3 Future research. Figure 1: Research framework of this study 15.

(23) Chapter 2: Literature review 2.1 Literature review of diversification strategy Diversification strategy is one of strategies for corporate to develop competitive advantage. Most of firms implement diversification strategy for increase market share and enhance economies of scale. Diversification occurs when a firm spread its operation to other business, industry, market, and productions. (Rumelt 1982).. Related literature define diversification as a firm entry into new lines of business. 政治大 Varadarajan 1989; Wan and 立Hoskisson 2003; Nath et al. 2010; Stern and Henderson activity through internal business development or acquisition (Ramanujam and. ‧ 國. 學. 2004). Firms expect diversification strategy help them to enhance competitive advantage and then generate high performance. Therefore, the linkage between. ‧. diversification and firm performance become important in strategic management field. sit. y. Nat. (Chen and Yu 2012; Ramanujam and Varadarajan 1989).. n. al. er. io. I summarize the theoretical perspective on diversification strategy as Table 1.. Ch. engchi. 16. i n U. v.

(24) Table 1: Literature summary of diversification strategy Author (Year) Rumelt (1982). Research Topic. Research Method. Research Conclusion and Research Implication. This study discusses the. 1. Descriptive paper. Research conclusion:. relationship between. 2. The theoretical foundation is. Diversification is the expansion of firms to produce and sell. diversification strategy and. 學. economies of scope to firms. Economics of scope increase the. ‧ 國. profitability.. several types of products or a product line with no market 政治大 diversification. interaction with each of the firm’s other products. According to 立 the neoclassical theory of firm size, the diversification brings economies of scope of product. return of firms and decrease the transaction costs. The. ‧. appropriate level of product diversity is balances economies of scope with diseconomies of organizational scale.. y. Nat. Research implication: Diversification creates economies of scope for firms but should be in an appropriate level. Diversification not always brings. n. al. er. io. sit. Product diversification is the basic form of diversification.. Ch. engchi. i n U. v. benefit to firms. Therefore, I focus on the negative impact of the product diversification on firms’ performance.. Hill and. This study discusses the. 1. Descriptive paper. Research conclusion:. Hoskisson (1987). strategies of multiproduct. 2. The argument is based on a. Organizational and environmental constraints inhibit the benefit. firms for realizing economic. multiproduct firm.. generation from diversification. Organizational constraints are. benefits.. the numbers of independent sub-units controlled directly by. 17.

(25) headquarter. The environment constraints are the impact of uncertainty. Under the uncertain environment, firms hard to manage interdivisional transaction. Therefore, firms have high requirements on information. Research implication:. 立. diversification as the expansion of new lines of activity through internal business development or acquisition. The diversification changes firms’ administrative structure, systems, and other. al. management processes. Therefore, one of the issues in corporate. n. strategic management.. This study concludes from prior related to literature and define. io. framework from the view of. 2. Related paper from 1962-1963. y. the diversification research. Research conclusion:. sit. diversification and discuss. 1. Literature review paper. er. (1989). ‧ 國. research related to. market.. ‧. Varadarajan. impact of diversification on firm performance in an emerging. 學. This study reviews the. emerging market. Thus, in this study I investigate the negative. Nat. Ramanujam and. Firms in emerging market face high uncertain and imperfect 政治大 environment. The benefit of diversification may not show in. Ch. engchi. i n U. v. diversification is the relationship between diversity status, market structure, and performance. Research implication: This study provides a whole picture of diversification from the view of strategic management. Thus, I follow its definition of diversification and investigate the role of human capital in the. 18.

(26) relationship between diversification and firm performance. Berger and Ofek. This study examines the. 1. Empirical study. Research conclusion:. (1995). effect of diversification on. 2. Research samples are U.S.. Overinvestment decreases the firm value for diversified firms.. 3. Research period is from 1986 to. 立. diversification and firm. 1. Empirical study. Research conclusion:. 2. The research samples are. The relationship between diversification and firm performance. Japanese multinational. changes over time. The impact of product diversity is weak on. companies.. firm performance only in one time period.. Nat. performance.. for those firms with multi-line business.. ‧ 國. association between. diversification may be higher than potential benefit especially. ‧. (2000). governance, the potential cost of. 學. This study discusses the. overinvest more than single-line business.. Research implication: 政治大 From the view of. 1991.. Geringer et al.. Moreover, the business segments in diversified firms usually. 3. The research period is from 1977. y. business segments.. companies.. Research implication:. sit. firm value for individual. al. performance from the view of resource-based theory and. n. er. This study discusses the impact of diversification on firm. io. to 1993.. Ch. engchi. i n U. v. transaction cost theory. These arguments are useful for us to understand the positive and negative impact of diversification on firm performance and then develop our hypotheses under emerging markets.. Khanna and. This study analyzes the. 1. Empirical study. Research conclusion:. Palepu (2000). difference in performance of. 2. The research samples are Indian. The performance of group diversification decreases initially and. 19.

(27) business groups.. affiliates of diversified. subsequently increases when group diversification exceeds a. 3. The authors analyse data from. business groups and. 1993.. un-affiliated firms in an. certain size. Moreover, the most diversified business groups are benefit from replicating the functions of institutions which are. emerging market.. missing in emerging market. Research implication:. 立. Diversification has positive impact on firms through the increase 政治大 of economies scope, but has negative impact on firms by high governance cost. Emerging market face imperfect environment. ‧ 國. 學. includes contract enforcement, enforce property rights and. between divisions in diversified firms and tests the prediction.. y. Research conclusion:. 2. The research samples are. Internal power struggles influence the research allocation. al. diversified U.S. firms, include. Ch. 156,598 firm-segment-years.. engchi. 3. The research period is from 1980 to 1993.. sit. 1. Empirical study. n. and resource allocation. perform well in the beginning of extend their business.. er. of internal power struggles. ‧. (2000). governance, the cost of diversification is high. Firms may not. io. This study develops a model. in highly divarication to face to uncertainty. From the view of. Nat. Rajan et al.. regulatory structures. Firms in emerging market have to operate. between divisions. The resource misallocation damages the firm. i n U. v. value. Moreover, the expectation of reallocation in the future distorts the investment of divisions today. Research implication: The political battles increase the cost of diversity of firms. From the governance view, the resource allocation to divisions would be inappropriate especially in an inefficient internal capital. 20.

(28) market. Denis et al.. This study examines the. 1. Empirical study. Research conclusion:. (2002). relationship between. 2. The research samples are 7520. The diversified experience decrease firms’ excess value.. U.S. firms.. diversified experience and. 3. The research period is from 1984 to 1997.. market.. 立. costs of diversification may outweigh the benefit. The 政治大 relationship between diversified experience and firm excess value is related to firms strategy choosing.. ‧ 國. 學. performance.. y. Research conclusion:. 2. The research samples are 16. In this study, home country is a factor that facilitates. al. West European countries.. transformational. The Netherlands, Norway,. diversification has negative influence on firm performance under. Sweden, Switzerland, and UK.. more munificent environments. However, product diversification. activities and institutions that foster v i The munificent home countries transactional activates. Home country environment has n Ch U e n gGermany, are Denmark, France, c h i significant influence on firm’s diversification strategies. Product. n. environments, and firm. diversification on firm performance.. 1. Empirical study. corporate diversification strategies, home country. resource or no ability. Thus, I examine the negative impact of. 3.. sit. relationship between. may suffer high cost in extend their scope when they have no. ‧. Hoskisson (2003). Diversification is not always brings benefit to every firm. Firms. io. This study examines the. Research conclusion:. Nat. Wan and. diversified experience. The findings of this study show that the. er. firm excess value in U.S.. However, the excess value of firms increase by cease being. 4. The less munificent home countries are Austria, Belgium,. 21. has positive influence on firm performance under less munificent environments..

(29) Finland, Ireland, Italy, Portugal,. Research implication:. Spain, and Turkey.. This study highlights the importance of product diversification for less munificent environments. Under the less munificent environments, firms create substitutes for factors and institutions through product diversification strategies. Thus, I discuss the. 1.. Henderson. relationship between. 2.. (2004). within-business. firms.. relationship. 3. The manufacturers are come. between. within-business. diversity. and. organizational survival depend on the amount of environmental. ‧. change, such as the situation of firm’s competitors. When. 1975 through 1994.. competitors diversify their own product portfolios and innovate. y. Nat. from the industry’s founding in. technologically change the impact of within-business diversity. io. sit. organizational survival.. product lines or the extension of new product line. The. on survival.. Research implication:. n. al. er. diversification and. existing. personal computer manufacture. ‧ 國. This study examines the. 學. Stern and. role of product diversification in an emerging market. 政治大 Empirical study Research conclusion: 立 The research samples are U.S. Within-business diversification is the extension of. Ch. engchi. i n U. v. This study discusses within-business diversification from the view of resource sharing within business and product line structure based on resource-based theory and knowledge. transfer. The discussion in this study is helpful in understanding diversification in technology-intensive industry by knowledge and technology change. Thus, I consider the industry knowledge. 22.

(30) from directors and block shareholders in the hypothesis related to impact of diversification on firm performance. 1. Analytical paper. Brusco and. This study develops a model. Panunzi (2005). to explain the diversification. The process of headquarters reallocate funds across divisions is. discount in conglomerates.. winner-picking. The ability of winner-picking may related to. Research conclusion:. both costs and benefits. The results of this study show that ex 政治大 ante diversity in divisions’ profitability increases the inefficiency. 立. of an internal capital market. Moreover, the mismatches between. ‧ 國. 學. divisions’ size and profitability reduce the value of internal. governance, shareholder rights, and firm value.. y. Research conclusion:. 2. The research samples are U.S.. When the shareholder rights are weak, firms manage. al. companies.. Ch. diversification unwisely and decline their value. In this situation,. 3. The research period is from 1993 to 1998.. sit. 1. Empirical study. n. diversification, corporate. generate firm value from diversity operation.. er. relationship between firms’. ‧. (2006). The ability of decision makers in headquarter is a key to. io. This study examines the. Research implication:. Nat. Jiraporn et al.. capital market.. engchi. i n U. v. firms suffer from a deeper diversification discount. Research implication: From the view point of governance, firms face high diversification discount by agency costs. The cost of diversification is more severe in weak governance than strong governance and then damage firm value.. 23.

(31) Datta et al.. This study examines the. 1. Empirical study. Research conclusion:. (2009). relationship between CEO. 2. The research samples are U.S.. The benefit of diversification comes from the efficiency of. diversified firms.. allocation resources in an internal market. The self-interest of. 3. The research period is from 1992 to 2003.. diversification cost.. 立. create diversification discount. However, this diversification. discount may be ameliorated by CEO incentive compensation. 政治大 Research implication:. One of the reasons of diversification discount is the private. ‧ 國. 學. benefits derived by managers. Therefore, the way to create value. relationship between firms’. financial performance.. 1. Empirical study. Research conclusion:. 2. The research samples are UK. When firms implement their diversification strategies, they need. based logistic companies.. the extensive knowledge of new product or services and they. al. 3. The research period is from 2005. n. diversification strategies, and. monitor and advice from directors and shareholders.. io. functional capability,. ‧. This study examines the. behaviour such as increase incentive compensation or the. Nat. Nath et al. (2010). from diversification is eliminating managers’ self-interest. to 2006.. Ch. engchi. y. internal capital market, and. managers increase the misallocation in internal capital and then. sit. allocation efficiency in an. er. incentive compensation,. have to transfer of resources between parent and the partner. i n U. v. companies. According to the resource-based view, the knowledge transfer between parent and partners is a complex process. Therefore, this study finds a negative impact of service diversification on business performance. The key of product or service diversification is the leveraging strategic resources and functional capabilities across different product or service.. 24.

(32) Research implication: This study discusses the impact of diversification strategy from the view of resource-based view and finds a negative impact of diversification on firm performance. The arguments in this study are related to the process of knowledge and resource sharing in. diversification strategy. Thus, I discusses the knowledge and 政治大 resource from board and block shareholder.. 立. 1. Empirical study. Research conclusion:. (2012). relationship between. 2. The research samples are 98. The empirical results show that there is a U-shaped relationship. 3. The research period is from 2006 to 2009.. performance. and. no. relationship. with. mid-term. firm. performance.. y. self-interest perspective.. Moreover, diversification has positive impact on short-term firm. Nat. view of agency theory. Exchange.. Research implication:. io. sit. firm performance from the. between managerial ownership and corporate diversification.. ‧. corporate diversification, and. public traded in Taiwan Stock. This study use Taiwanese data to discuss the impact of diversification on firm performance which is helpful for us to. n. al. er. managerial ownership,. ‧ 國. This study examines the. 學. Chen and Yu. Ch. engchi. i n U. v. understand. how. corporate. diversification. affect. firm. performance in an emerging market. The arguments from agency theory also helpful for our hypotheses development on the linkage of shareholders and firm diversification.. Kistruck et al.. This study examines the. 1. Empirical study. Research conclusion:. (2013). relationship between. 2. The research samples are 3616. The key mechanism in the impact of charity’s diversification on. 25.

(33) different types of diversification and the efficiency of charitable. charities in Canada.. efficiency is the transaction costs. The transaction cost increase. 3. The research period is from 1997 to 2001.. when charity seek out and maintain external resources from donors to develop their own capabilities. The empirical results. organization.. show that the relationship between geographic diversification and efficiency is U shaped in nature. However, the relationship. 立. between product diversification and efficiency is inverted U 政治大 shaped. This study suggests that the relationship between one type of diversification and efficiencies depends on the level of. ‧ 國. 學. the other type of diversification.. diversification strategies.. y. Research conclusion:. 2. The research samples are 187. Firms with high diversification experience have signification. al. European firms and 580 U.S. firms.. Ch. engchi. 3. The research period is 1993 to 2007.. sit. 1. Empirical study. n. experience in firms’. obtaining external resource of firms in emerging markets.. er. of prior diversification. ‧. (2015). implementation of diversification. Thus, I consider the cost of. io. This study examines the role. This study addresses the problem of high transaction cost in the. Nat. Mayer et al.. Research implication:. growth in product and international diversification. Any form of. i n U. v. prior diversification experience helps firms to develop capabilities to expansion their product and international economics of scope. Research implication: This study investigates the role of prior diversification experience in the implement of product and international. 26.

(34) diversification. Prior experience is important in diversification strategies. Thus, I examine the industry experience from directors and block shareholders on the relationship between product diversification and firm performance. Benito‐Osorio et. This study examines the. 1. Empirical study. al. (2015). relationship between product. 2.. diversification and 3.. to 2008.. 學. relationship change by the institutional environments. The. ‧ 國. optimal level of diversification is higher in larger firms.. ‧. Research implication: This. study. discusses. product. diversification-performance. y. Nat. relationship from the view of economics and finance and. io. sit. resource-based view. The discussion in this study provides a deep understanding of diversification.. n. al. er. performance.. Research conclusion:. The research samples There is an inverted U-shaped relationship between product 政 are治大 Spanish manufacturing firms. diversification and performance. This relationship is identical in 立 The research period is from 1994 different level of firm size. Product diversification-performance. Ch. engchi. 27. i n U. v.

(35) From Table 1, there are two main views in discussion of the relationship between diversification strategies and firm performance. One is from the view of resource-based theory and the other one is from the view of governance. Based on resource-based view, firms have various natures of resources and depend on their ability to create new resources to achieve competitive advantage (Makadok 2001). Resource-based theory in diversification strategies discusses firms’ capabilities or tacit knowledge-based routines which can be extended from on factors of the firm to another. Product diversification strategies help firms leverage strategic. 政治大 resources provide economies 立of scale to business-related capabilities and earn rents resources and firm-specific capabilities across product lines. The leveraging of. ‧ 國. 學. from more customers (Geringer et al. 2000). Diversification strategies generate sustained competitive advantage to firms and enhance their performance (Barney. ‧. 2001). However, diversification strategy not only provides advantage but also. sit. y. Nat. generate some disadvantage to firms. Resource-based theory is also related to. n. al. er. io. transaction cost economics theory (Conner 1991). Diversification increase the. i n U. v. complexity of firm operation, no matter whether related or unrelated diversification.. Ch. engchi. The managerial and organizational complexities increase cost and conflict in firm operation (Geringer et al. 2000). Based on transaction cost theory, coordination cost increase due to increasing complexity from high diversification. From governance view, firms overcome external capital market failures through diversification. Diversification strategy helps a firm to create its own internal market to solve agency problems. In diversified firms, head office is an internal shareholder which monitors the performance directly. The implication of diversification make firms allocate resources optimally and manage divisions more effectively than external capital market by generate cash flows internally and pool all resources 28.

(36) together (Hill and Hoskisson 1987; Berger and Ofek 1995). However, diversification strategy may also increase governance cost (Geringer et al. 2000). The implementation of diversification increase information asymmetry and incentive misalignment between head office and division managers (Chen and Yu 2012). The power struggles between divisions in allocation resources. Firm value relate to resource misallocation and diversification discount (Berger and Ofek 1995; Rajan et al. 2000). Firma may input discretionary resources in value-decreasing investment or allocate funds to that poor division instead of better-performing divisions. These. 政治大. misallocation increase diversification discount and decrease the value of diversify firms.. 立. There are both benefit and cost from resource-based view and governance view.. ‧ 國. 學. Diversification literature still cannot find consistent evidence in the relationship. ‧. between diversity and firm performance. Therefore, I will list the arguments and. n. al 2.1.1 Resource-based view. er. io. sit. y. Nat. findings in related research from these two view point.. Ch. engchi. i n U. v. The researches of diversification strategies are based heavily on the resource-based theory. However, Conner (1991) argues that resource-based theory is related to transaction cost theory. The governance cost increase from high level of diversification. Although diversification strategies reduce bureaucratic costs from internal market governance, the increased size and complexity of firm may usually cause the accumulated inefficiencies. Geringer et al. (2000) combine resource-based theory and transaction cost theory to argue that the relationship between diversification strategy and firm performance is non-linear. Diversifications bring 29.

(37) strategic resources and capabilities to firms and create greater scope. On the other hand, diversification also increases a lot of cost such as product exceeds the range of rent-yielding resources and governance scope surpasses management capabilities. This study uses the Japanese multinational firms as sample to show that diversification has influence on firm performance but this influence change over time. However, product diversification strategies hardly vary over time, despite great change in Japan. This result shows that as environmental conditions is a factor in the relationship between diversification and firm performance. When external. 政治大 diversification has vary influence on firm performance. 立. environment change, firms implement vary diversification strategies and the. diversification. has. 學. international. ‧ 國. In the discussion of multinational diversification, the results show that negative profitability but. positive growth. ‧. consequence to firms. International diversification is less valuable in practice than in. sit. y. Nat. theory especially during periods of rapid economic change and or generating profits. io. er. through economies of scale. This evidence suggests that global management is difficult and environmental conditions also have influence on it. In conclusion the. al. n. v i n C h strategies and firm relationship between diversification performance vary over time engchi U and vary from environment condition.. Nath et al. (2010) discuss diversification strategies based on resource-based view (RBV) theory. They use RBV framework to assess how firms’ resources and diversification strategies affect its financial performance. Based on RBV, diversity extends the firm’s resources into new markets and businesses. When firms implement diversification strategies within the scope of their resources, they gain economies of scale through decreasing operational costs and leveraging superior business efficiency through shared fixed assets. 30.

(38) This study use archival data of 102 UK based logistics companies and finds a negative impact of diversification on logistics firm’s performance just like diversification literature shows that not all firms enhance their performance through diversification strategies. There are three requirements of diversification: (1) assimilation of extensive knowledge related to new product development, (2) understanding of the culture in new markets, and (3) transformation of resources with partner firms. This argument consists with RBV literature which emphasize that capabilities transfer such as knowledge between parent and partners is a complex. 政治大 The results of this study show that product diversification is negative but 立. process.. international diversification is positive to firm performance under certain context.. ‧ 國. 學. When firms implementation their product diversification strategy, they need to. ‧. leverage their strategic resources and functional capabilities across various product. sit. y. Nat. areas. On the other hand, international diversification requires knowledge related of. io. from local partners and increasing local ownership.. al. er. local business environment in a new geographical market such as active participation. n. v i n C h the impact of Udiversification strategy on firm Chen and Yu (2012) investigate engchi. performance under emerging markets. They believe the contexts difference between developed market and emerging markets would bring the different impact of diversification. There are three institutional issues in emerging markets: (1) weak shareholder and creditor protection, (2) poor legal systems, and (3) agency problem is not between owners and managers but between controlling shareholders and minority shareholders. Therefore, examining the relationship between managerial ownership and diversification for emerging market firms is necessary. This study develops hypotheses based on the agency theory self-interest perspective and investigates the 31.

(39) inter-relationships. between. managerial. ownership,. firm. diversification. and. performance. After the test of Taiwanese firms, this study finds that there is a U-shape nonlinear relationship between managerial ownership and diversification.. In the. short run, the diversification has positive impact on firm performance. Diversification strategies potentially provide access of skills, resource, assets, or competencies for firms. All of these resources cannot be purchased by nondiversified in a competitive market.. 政治大 phenomenon from agency theory. 立. The data shows a diminishing performance over time for diversified firms. This study explains the. Owner-managers with. self-interest may pursue diversification strategies to reach personal objectives.. ‧ 國. 學. However, they may evaluate of new projects inadequately and those poor projects. ‧. increase managerial cost and have poor integration capabilities. In the other words,. sit. y. Nat. diversification strategies may increase governance costs and then decrease the. io. n. al. er. performance of firms.. 2.1.2 Governance view. Ch. engchi. i n U. v. Motivated by agency theory, Jiraporn et al. (2006) explore how to explain diversification premium or diversification discount by agency costs. This study examines the relationship between firm value, corporate governance, shareholders rights, and the level of diversification to discuss the role of agency cost. Based on the literature of shareholder rights, this study argue that weak shareholder rights may cause unwisely diversification strategy of firms and then result a decline in firm value. This study gets empirical results to support its arguments. The evidence revels 32.

(40) that firms with weak shareholder rights suffer a deeper diversification discount which means firm value decrease a lot by diversification. The results show that when shareholder rights are more suppressed, agency costs from the conflicts between ownership and control are more acute. In consequence, the cost of diversification would be more sever and then damage the value of firms. Emerging market context is different to developed markets. According to transaction cost theory, the optimal structure of a firm depends on its institutional context. Khanna and Palepu (2000) argue that the diversification has potential benefit. 政治大 emerging markets face information and agency problems which cause variety of 立. under the special context in emerging markets. Compare to developed markets,. market failures. Moreover, emerging markets lack intermediary institutions so it is. ‧ 國. 學. costly form them to acquire necessary resources. In the imperfect market, large. ‧. diversified business group in emerging markets could be an intermediary between. sit. y. Nat. individual entrepreneurs and market. Firms have benefit through diversification.. io. er. However, there are some potential costs of group affiliation. The conflicts of interest between controlling shareholders and minority shareholders would be. al. n. v i n increase in diversified groups. C The agency problem would h e n g c h i U be worse and governance. cost would increase in those firms due to weak disclosure requirements, ineffective governance mechanisms and poor corporate control in emerging markets. This study compares the performance of group affiliates with the performance of unaffiliated firms in India to figure out the impact of diversification on performance. The comparison results show that there is a negative relationship between diversification and performance initially, but the performance enhance when the diversity exceeds a certain level. The imperfect contexts of emerging make diversification costly. However, large diversified business groups have the economies 33.

(41) scale to offset the costs of creating new structures and the governance costs. Rajan et al. (2000) investigate the relationship between resource allocation and the value of diversified firms. Typically, efficient internal capital market models address that diversification strategies create value form firms. Cash flows generate internally can be pooled and allocate to best use by diversified firms. However, there would be internal power struggles between segments in firms. This study builds a model of internal power struggles in the allocation of resources between divisions. The model focuses on capital budgeting problem in a diversified. 政治大 theoretical modelling, this study also uses data to test the model and shows that 立. firm. Capital budgeting is one of political battles between various divisions. Not only. diversity is indeed costly. Resource misallocation damages the value of diversified. ‧ 國. 學. firms.. ‧. This study also suggests that dynamic evolution of investment opportunities. sit. y. Nat. within or across different divisions affect the nature of diversification discount such as. io. er. size. An efficient internal market need firm to reallocate resources based on opportunities. However, expect of reallocation in the future, divisions would distort. n. al. investment today.. Ch. engchi. i n U. v. Wan and Hoskisson (2003) argue that the relationship between diversification strategies and firm performance largely conceptualized from an institutional economics perspective. Based on institutional economics perspective, institution is a country’s incentive structure and economic specialization. Without institutions or the rule, complex interfirm transactions would be costly and business dealing would be restricted to known parties. Institutions play an important role in influence of business activities. This study use home country environments as consisting of factors and institutions. Factors are for goods and services production which is used for 34.

(42) transformational activities. Institutions are for transactional activities which exchange inputs and outputs with other parties. This study discusses the how country-level environmental munificence affect the relationship between diversification strategies and firm performance. The empirical results support that home country environment is important in the diversification strategies by using a sample of firms from six Western European countries. The results show that product diversification has negative impact on firm performance in more munificent environments but has positive impact on. 政治大 effects of diversification found in prior researches may condition by the country 立 performance in less munificent environments. The results suggest that the negative. environmental context especially the researches with samples of United States-based. ‧ 國. 學. firms.. ‧. This study also examines the impact of international diversification strategies. sit. y. Nat. and distinguishes them into outbound international diversification and inbound. io. er. international diversification. In consider of outbound international diversification, international diversification bring benefit to firms in more munificent environments.. al. n. v i n C h have no gain U Firms in less munificent environments but also no loss from outbound engchi international diversification because they usually have no global competitiveness. The. test of inbound international diversification has different results. The association costs may nullify the potential benefits, so this strategy may not always have positive impact on firm performance. Moreover, this study finds that highly product diversification reap more benefits from inbound international diversification for firms in less munificent environments. Berger and Ofek (1995) investigates the sources of gains and losses from diversification of firms.. From the theoretical arguments of diversification, there are 35.

(43) both value-enhancing and value-reducing effects of diversification. The potential benefits of diversification are (1) greater operating efficiency by operation of different lines of business with common assets, (2) less incentive to give up positive net present value projects, (3) greater debt capacity. On the other hand, the potential costs include (1) larger discretionary resources put in value-decreasing investments, (2) cross-subsidization in poor-performing division but drop off better divisions, and (3) misalignment of incentives between headquarter and division managers. This study examines which factors from diversification influence firm value.. 政治大 stand-alone values for individual business segments in diversified firm. This study 立 This study estimates the impact of diversification on firm value by imputing. finds that comparing the sum of stand-alone values to the firm’s actual value, there. ‧ 國. 學. are 13% to 15% average value loss from diversification. The results from empirical. ‧. analysis show that two sources of losses from diversification are overinvestment and. sit. y. Nat. cross-subsidization. Overinvestment by segments of multi-segment firms is large than. io. er. single-line firms and more overinvestment is associated with less excess value for those multi-segment firms. Multi-segment firms with negative cash flow segments. al. n. v i n Ch have larger value loss than single-segment firms which means subsidization of poorly engchi U performing segments contributes to the value loss from diversification.. Diversification discount exists commonly in the practice. Internal capital markets create value in financial constrained firms (Stein 1997). The activity of headquarters in diversified firms is “winner-picking”.. Divisions have to compete for the. resources and funds and headquarters pick winners and losers to allocate resources. Brusco and Panunzi (2005) consider a two-period model with two divisions and a headquarters in an internal capital market. The ability of headquarters to prick winner and reallocate funds has benefit but also cost. The benefit comes from 36.

(44) transferring funds to the most profitable divisions and creates value for firms. On the other hand, the cost comes from the weaker managerial incentive.. This study shows. that ex ante diversity in divisions’ profitability make internal capital market inefficient. At the same time, misallocation between divisions’ size and profitability reduce the value of internal capital markets. Stern and Henderson (2004) indicate that the relationship between diversity and firm performance are varying from external environment change among firms. Diversified firms not only operate across business but also within business as Stern and 政治大 Henderson (2004) argues that related diversification would be benefit to firms when 立 extension in existing product lines and expand into new business.. from resource sharing.. 學. ‧ 國. subunits are similar in their technologies and organizational contexts. This idea comes. On the other hand, external environment also influence firms’. ‧. knowledge development and information processing. The external environment. sit. y. Nat. factors discussed in this paper are competition and technological change. Effectively. io. er. transferring knowledge between two units is affected by their external environments. When two parties have similar environments, they would transfer knowledge and. n. al. resource effectively.. Ch. engchi. i n U. v. This study builds a model based on resource sharing within and across a firm’s product lines and test how diversification is important inside business. The results show that the relationship between within-business diversity and survival is contingent on external environment changes which are changes in competitors’ product portfolios and innovated technological change.. 37.