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.
Methodology
Variables
Performance of the firms is measured by the return on assets (ROA). International diversification is the proportion of foreign sales to the total sales of the firm. Total R&D expenditure will be divided by the total assets to operationalize in the framework. R&D intensity of a firm is measured to see to what extent the firm has a focus on improving the innovation as a competitive strategy implementation. By the same token, we used a ratio of capital expenditure to total assets, so that the size of the company would be factored out and bigger firms would not imply higher capital expenditure.
International diversification is operationalized as the ratio of foreign sales to total sales. The data is again pulled from the COMPUSTAT segment database. This measure includes the sales from identified geographic segments minus its allocated share of operating costs and expenses (i.e. COGS, selling, general and administrative expenses, and depreciation, depletion and amortization). The foreign sales and foreign assets are given for each geographical region in which the firm is operating. Therefore, for some of the firms there are several foreign sales and assets observations due to multiple geographic segments associated with the firm's operations. The firm country of domicile is not restricted to the United States. Thus, the foreign geographic segments include continental segments such as the United States, Europe, Asia as well as some individual countries. Not all firms have the same span of geographical operations. In the COMPUSTAT raw data, foreign segment observations for sales and assets are subtotaled, giving the total amount of sales and assets for all foreign segments.
In order to attain a robust diversification variable, besides sales information, foreign assets are also pulled and divided by total assets for firms in the sample. Regression results regarding the asset diversification variable are also provided in the results section. In addition, only observations that have a diversification ratio higher than 5% are included in our sample.