The effect of inter- and intra-regional geographic diversification strategies on firm performance in China

Abstract

PurposeThe purpose of this paper is to theorize and empirically examine the effects of intra- and inter-regional geographic diversification on firm performance in China. Furthermore, it investigates they key firm capabilities, which moderate the relationships between intra- and inter-regional geographic diversification and firm performance.Design/methodology/approachIn this research, the authors studied 366 listed companies that invest in mainland China. The authors used theTaiwan Economy Journaldatabase to construct a panel data set from 2005 to 2014 and employed panel regression estimations as part of the empirical analyses.FindingsThe authors find that the effect of regional diversification on firm performance is significantly influenced by the contexts of the expansion. More specifically, the results show that the effect of intra-regional geographic diversification on firm performance takes the form of a U-shape relationship. In contrast, the authors find that inter-regional geographic diversification has a negative effect on firm performance. Firm marketing, research and development (R&D) and managerial capabilities moderate these relationships.Research limitations/implicationsFirst, the companies studied in this research are mainly Taiwanese manufacturers with investments in mainland China. Second, the current model can be expanded by exploring additional process explanations and moderators in future research.Practical implicationsAn important practical implication of this research is that when firms choose an intra-regional expansion strategy in China, they should adopt a moderate provincial diversification strategy in the invested region and reinforce its marketing capability to enhance firm performance. A careful consideration of a firm’s marketing, R&D and managerial capabilities is needed for successful regional diversification strategies in the China market.Originality/valueThe findings of this study contribute significantly to the existing literature on firms’ regional diversification. First, the authors explore and empirically test intra- and inter-regional geographic diversification strategies in China. The authors find that the effect of regional diversification on firm performance varies according to the contexts of the expansion (for instance, global, regional, in a single country). Second, this study furthers the research theme of intra- and inter-regional diversification by introducing and investigating previously unexplored firm capabilities as part of the framework.