Although previous studies on international diversification are plentiful, they mainly focus on the effect of international diversification on overall firm performance, and the results are mixed. This study extends this line of research and explores the impact of international diversification on new product performance. Specifically, we ask if international diversification explains the stock market reactions to new product introduction (NPI) announcements. We find an inverted-U-shaped relationship between international diversification and the announcement returns of NPIs, revealing that the market value of NPIs initially improves and then declines with increasing international diversification. The results also show that intangible assets, such as technological and marketing capabilities, positively moderate the relationship between international diversification and the market value of NPIs. Our study not only highlights the importance of considering both sides of international diversification in affecting investors' assessments of corporate new product strategies, but also shows the possibility of internal capabilities in changing the fixed relationship between international diversification and the market value of new products.
According to the theory of foreign direct investment (FDI) (Caves, 1996, Dunning, 1988 and Hymer, 1976) and portfolio theory (Jacquillat and Solnik, 1978, Lessard, 1973, Lessard, 1976 and Solnik, 1974), international diversification will lead to higher firm value. However, existing studies examining the impact of international diversification on firm performance have yielded inconclusive results. The results on the relationship between international diversification and firm performance has been found to be positive (Delios and Beamish, 1999, Grant, 1987 and Rugman et al., 2008), negative (Collins, 1990 and Zaheer and Mosakowski, 1997), U-shaped (Capar and Kotabe, 2003, Gaur and Kumar, 2009 and Lu and Beamish, 2001), inverted-U-shaped (Brock et al., 2006, Garbe and Richter, 2009, Gomes and Ramaswamy, 1999 and Hitt et al., 1997) and horizontal-S-shaped (Contractor et al., 2003, Lu and Beamish, 2004 and Ruigrok et al., 2007).
This paper examines the importance of international diversification in explaining the stock market reactions to NPI announcements. Using NPI announcements from the period 1997–2005, we found an inverted-U-shaped relationship between international diversification and the market value of NPIs, with a slope positive at lower levels of international diversification but negative at higher levels of international diversification. This relationship is moderated by the intangible assets possessed by internationally diversified firms. We find that announcing firms with greater technological and/or marketing capabilities achieve higher abnormal returns from NPIs. The main effects of the international diversification variables still hold after the inclusion of these moderating factors.
