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Multinationals' diversification and the risk-return trade-off

Author: Kim, W. Chan ; Hwang, Peter ; Burgers, Willem P.INSEAD Area: StrategyIn: Strategic Management Journal, vol. 14, 1993 Language: EnglishDescription: p. 275-286.Other Title: Multinationals' diversification and the risk-return tradeoff Type of document: INSEAD ArticleNote: Please ask the Library for this articleAbstract: This paper advances a theoretical rationale to explain Bowman's paradox (1980) that firms with high returns can have low risk. Drawing on international management research, we argue that global market diversification, which provides multinational firms with three distinct options and opportunities over domestic firms, can explain the paradox. We also argue that no strong theoretical rationale exits in support of either related or unrelated product diversification generating such a favourable risk-return profile. By integrating both the product and the global market dimension of diversification into our analyses, and by controlling for the industry effect, this paper sheds new light on the relationship between corporate diversification and the risk-return tradeoff. The results based on the diversification experiences of 125 multinationals, reveal the strikingly important, though so far overlooked, role that global market diversification plays in the joint management of corporate risk and return
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This paper advances a theoretical rationale to explain Bowman's paradox (1980) that firms with high returns can have low risk. Drawing on international management research, we argue that global market diversification, which provides multinational firms with three distinct options and opportunities over domestic firms, can explain the paradox. We also argue that no strong theoretical rationale exits in support of either related or unrelated product diversification generating such a favourable risk-return profile. By integrating both the product and the global market dimension of diversification into our analyses, and by controlling for the industry effect, this paper sheds new light on the relationship between corporate diversification and the risk-return tradeoff. The results based on the diversification experiences of 125 multinationals, reveal the strikingly important, though so far overlooked, role that global market diversification plays in the joint management of corporate risk and return

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