International Diversification and the Market Value of New Product Introduction

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Journal of International Management 17 (2011) 333–347

Contents lists available at ScienceDirect

Journal of International Management

International diversification and the market value of new
product introduction
Chi-Feng Wang a,1, Li-Yu Chen b,⁎, Shao-Chi Chang c,2
a
b
c

Department of Business Administration, National Yunlin University of Science and Technology, Taiwan Department of Management, Fo Guang University, Taiwan
Institute of International Business, National Cheng Kung University, Taiwan

article

info

Article history:
Received 11 January 2011
Received in revised form 31 March 2011
Accepted 31 March 2011
Available online 2 May 2011
Keywords:
International diversification
New product introduction
Technological capability
Marketing capability
Event study

abstract
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.

© 2011 Elsevier Inc. All rights reserved.

1. Introduction
According to the theory of foreign direct investment (FDI) (Caves, 1996; Dunning, 1988; Hymer, 1976) and portfolio theory (Jacquillat and Solnik, 1978; Lessard, 1973, 1976; 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; Rugman et al., 2008), negative (Collins, 1990; Zaheer and Mosakowski, 1997), U-shaped (Capar and Kotabe, 2003; Gaur and Kumar, 2009; Lu and Beamish, 2001), inverted-U-shaped (Brock et al., 2006; Garbe and Richter, 2009; Gomes and Ramaswamy, 1999; Hitt et al., 1997) and horizontal-S-shaped (Contractor et al., 2003; Lu and Beamish, 2004; Ruigrok et al., 2007).

To better understand the influence of international diversification, we extend this line of research by studying the impact of international diversification on new product performance. Specifically, we test if international diversification explains the stock

⁎ Corresponding author at: Present address: Department of Management, Fo Guang University, No. 160, Linwei Rd., Jiaosi, Yilan County 26247, Taiwan. Tel.: + 886 3 9871000 23816.
E-mail addresses: faywang@anet.net.tw (C.-F. Wang), lychen@mail.fgu.edu.tw (L.-Y. Chen), schang@mail.ncku.edu.tw (S.-C. Chang). 1
Present address: Department of Business Administration, National Yunlin University of Science and Technology, No.123, University Road, Section 3, Douliou, Yunlin 64002, Taiwan. Tel.: + 886 5 5342601x5245.

2
Present address: Institute of International Business, National Cheng Kung University, No.1, University Road, 701, Tainan, Taiwan. Tel.: + 886 6 2757575x53506. 1075-4253/$ – see front matter ©...
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