Foreign Direct Investment, Diversification and Firm Performance

In this study we present evidence that geographic diversification increases shareholder value and improves long-term performance when firms engage in core-related foreign direct (greenfield) investments. Non-core-related foreign investments are found to be associated with both short-term and long-term losses. Our results suggest that the synergy gains stemming from the internalization of markets are rooted in the core business of the firm. Geographic diversification outside the core business of the firm bears strongly against the prediction of the internalization hypothesis. The analysis also shows that, regardless of the industrial structure of the firm (that is, number of segments), foreign direct investments outside the core business of the firm are associated with a loss in shareholder value, whereas core-related (focused) foreign direct investments are found to be value increasing. Unrelated international diversification, however, is less harmful for diversified (multi-segment) than specialized (single-segment) firms. The larger gains to diversified firms suggest that operational and internal capital market efficiency gains are considerably greater in multi-segment than single-segment firms when both expand their core business overseas.