Formal institutions, type of diversification and the diversification – performance relationship: a meta-analysis

Abstract

Purpose

The authors meta-analyze research on the diversification–performance relationship to empirically establish the impact of home-country formal institutional quality on this relationship. Prior research assumes that a country’s formal institutional quality negatively affects the diversification–performance relationship, especially when it involves unrelated diversification. However, empirical evidence for these propositions is inconclusive because existing studies consider blocks of countries with limited institutional heterogeneity. To provide more clarity, this study aims to consider the diversification–performance relationship across developed, emerging and developing countries.

Design/methodology/approach

The meta-analysis relies on a sample of 293 effect sizes of the diversification–performance relationship from 76 primary studies across 15 countries between 1988 and 2019. The sample excludes effects sizes from papers that consider both product and international diversification to control for complex interactions between the strategies, as well as papers that did not consider both related and unrelated diversification.

Findings

The results confirm that stronger home-country formal institutions weaken the diversification–performance relationship by decreasing the relative efficiency of internal markets versus external ones. Further, the effect is less negative for related diversification because this strategy can better exploit market frictions in countries with stronger formal institutions and more efficient external markets than its unrelated counterpart.

Originality/value

The study contributes to the literatures on the diversification–performance relationship and home-country governance by providing robust evidence for how formal institutional quality impacts the efficacy of related and unrelated diversification.

Citation

Tashman, P., Spadafora, E. and Wagner, D.P.M. (2023), "Formal institutions, type of diversification and the diversification – performance relationship: a meta-analysis", Multinational Business Review, Vol. 31 No. 1, pp. 91-110. https://doi.org/10.1108/MBR-12-2021-0175