Resource Allocation, Level of International Diversification, and Firm Performance

Read this introduction to a resource-based approach toward international business that highlights topics like transaction costs theory and analytical models.

Introduction

Overview of Conceptual Framework

This study utilizes the transaction costs theory and resource-based view of the firm. The extant literature regarding the diversification strategies of firms is excessive. The highly-regarded diversification taxonomy was brought into literature by Rumelt that has been a ground for many academic works. However, there has not been substantial work on international diversification and its determinants.

Concerning the scope of this paper, allocation of resources as R&D and capital expenditures are discussed in terms of their impact on the business performance. The firms' innovative frontier is constrained by some limits such as human resources, expenditures of research and development divisions, the fit between R&D divisions and the business units. Expectation of both low cost and quality products in the global market motivates and drives firms into a focus of research and development even more. Certain bundles of resources in a firm's environment can create an advantage for the business if the process of strategy formulation can estimate the price of such resources and deploy an optimum specialized set of resources. The hypotheses stated for resource allocation are basically the followings: Higher R&D and capital expenditure lead to better performance output. The international diversification for those firms capable of going international, leads to better performance of the firm. Figure 1 is the proposed framework to be analyzed in this particular study.

The following are the hypotheses with regards to our conceptual model.

H1: The R&D expenditure is positively associated with firm performance.
H2: The capital expenditure is positively associated with firm performance.
H3: International diversification is positively associated with the firm's performance.
H4: International diversification has positive correlation with R&D and capital expenditure.
H5: Interactive terms of R&D, capital expenditure and international diversification (dual impacts) have a positive impact on a firm's performance.