The Relationship between Diversification Strategy and Firm Performance in Developed and Emerging Economy Contexts: Evidence from Turkey, Italy and Netherlands

(ProQuest: ... denotes formulae omitted.)1.INTRODUCTIONDiversification strategy can be defined as "Expanding or entering in new markets which are different from the firm's existing product lines or markets" (Jhonson and Scholes, 2002; Rumelt, 1982a). Diversification is subdivided into two groups. Related Diversification is market expansion into new areas within the sector that comprises. Unrelated diversification refers to the strategy where a business enters in a new market having no relation with the existing one (Jhonson and Scholes, 1999).In the emerged countries, a total of 82 prior researches were subjected to content analysis in a research carried out in 2000 (Palich, Cardinal and Miller, 2000). It is argued in the earlier literature that the relationship between diversification strategy and organizational performance is an inverted U-shaped curve. As a result, while performance and diversification will increase at the same time until the degree of diversification increases up to an optimum level, a decrease in the performance level will began. This relationship is positively influenced by the market sharing, joint and more efficient use of available resources and capacities, use of a similar product and process technology, production facilities, management capabilities, business programs and such factors (Nayyar, 1992; Palich, Cardinal and Miller 2000; Markides, 1994, 1995).The fact of diversification strategy and organizational performance has been studied by Chang (2007), Khanna and Palepu (1997, 2000a, 2000b, 2005), Lins and Servaes (2002), Shyu and Chen (2009), and many other researchers. As a result of the recent strategy research in emerging country environments (Chang and Hong, 2002; Hoskisson, Eden, Lau and Wright, 2000; Khanna and Palepu, 1997; Wan and Hoskisson, 2003) how country differences have an effect on the antecedents and results of firm diversification began to be questioned (Chakrabarti, Singh and Mahmood, 2007). Khanna and Palepu argues that different from the developed countries, the enterprises adopted diversification strategies can get benefit from corporate environment factors like gaps in the developing country markets, business government relations, production markets and labour markets (Khanna and Palepu, 1997, 2000a, 2000b, 2005).This study aims to compare the results of analysis made using Entropy Index measures of the relationship between diversification strategy and firm performance in Turkey, Italy and Netherlands. Thus, the first part includes a literature review about this relationship. Finally, the 2007-2011 data of the firms in Turkey, Italy and Netherlands were used to test the hypotheses.2.LITERATUREResources, Skills of a Firm as an Internal Capital Market in Emerged CountriesThe resource-based view (RBV) of the firm and the concept of core competencies that is less formal and more management-oriented derivative has become the most important research subject in strategic management (Zajac, Kraatz and Bresser, 2000). Contrary to the '(industry) structure-conduct-performance paradigm' of industrial organization economics (Porter, 1991), the competitive advantage of firms are explained mainly by their internal capabilities and resources, i.e. factors that exist essentially in heterogeneous firms (Duschek, 2004).There are lots of arguments about how and why diversification can provide higher profits. Mostly they are connected to the firm's RBV (Schilling and Steensma, 2002). Specifically, a firm is considered to have a stack of resources, which can become unproportional in relation to the present level of production (Argyres, 1996). In other words, some resources are usually available more than needed (Hislop, 1997). Penrose expresses that a business has an internal encouragement to diversify to take advantage of the excess resource when met with an amount of a particular resource that is more than expected, such as marketing (Li and Greenwood, 2004). …