Is there new evidence to show that product and international diversification influence SMEs' performance?

Abstract

PurposeThe purpose of this paper is to examine the joint effect of product and international diversification strategies on the performance of small and medium enterprises (SMEs) in Spain.Design/methodology/approachThe authors rely on a panel data of small and medium Spanish manufacturing enterprises over the period 1993‐2006, collected from the Spanish Survey of Business Strategies.FindingsThe evidence reveals the existence of a negative relationship between geographic expansion and profitability. Likewise, the adoption of both product and international diversification is not associated with higher performance.Research limitations/implicationsA promising avenue for future research is the analysis of firms located in different countries (for example, emerging economies), or the study of this issue considering factors such as the ownership structure (family firms, the role of the state and banks, etc.).Practical implicationsThe authors' analysis underlines the fact that the distinctive particularities of SMEs – for example, limited resources, lack of previous experience in the adoption of new products and accessing new markets – might constrain diversification as an alternative for firm growth. As a practical implication, Spanish SMEs should overcome their shortcomings before adopting diversification in order to improve the profitability associated with these strategies.Originality/valueAlthough Spain's economic structure is highly segmented and made up of mainly SMEs, research on these companies in this country is rather scarce. In particular, the distinctive characteristics of SMEs mean that diversification might have different performance implications than for larger companies. Moreover, the authors' analysis offers new insights compared to previous research, which has traditionally relied on cross‐section data.