Stephen Davies¹, Laura Rondi² and Alessandro Sembenelli²
(¹University of East Anglia, ²Ceris-Cnr)

 January 1997

 Abstract

Conventional explanations of diversification and multinationality both point to size/growth related motives and firm-specific intangible assets as the driving forces. However, previous empirical studies have rarely exploited this commonality by investigating multinationality and diversification jointly. Using a database of leading EU firms, we devise a typology of firm structures which distinguishes diversification at home and abroad. This provides the framework for a sequential probit model which focuses on the roles of firm size and product differentiation. Our results suggest that multinationality and diversification are complementary in the presence of product differentiation, indicating that specific assets are a public good within the firm. In other cases, size factors are more dominant: multinationality increases with the firm's absolute size in its home country (presumably because production abroad becomes more profitable relative to exporting); however, diversification also increases more with market share (perhaps as a means of escaping constraints on further growth). In these circumstances, multinationality may become a substitute for diversification, since the latter is no longer the only route to growth; but the reverse is not true, since diversification does not affect the relative profitability of foreign production.

 JEL Classification: L1, L2.