Abstract: A longitudinal research design was used to examine the relationship between international diversification and firm performance by observing Fortune 500 firms' international involvement from Jan 1985 to Jan 1994. Results suggest that a firm's international expansion concerning cultural relatedness or un relatedness does not affect accounting or market measures of performance. Increased heterogeneous cultural environments were also found not to cause declines in performance returns of international firms. We test the hypothesis that culturally related international diversification will have a positive impact on firm performance and that the opposite will be true for culturally unrelated globalization. Cultural diversity for Fortune 500 firms was used to predict performance over a ten-year period (1985-1994), controlling for several organizational and industry characteristics. Regression tests using nine indicators of cultural diversity revealed no significant cultural effects.

Alternate interpretations are offered. CULTURAL DIVERSITY AND FIRM PERFORMANCE The international business literature suggests several reasons why global diversification and firm performance should be positively related. First, markets are not perfectly integrated, thus involvement in more than one national market serves to balance out regional macroeconomic trends that are less than perfectly correlated. As a result, MNEs should experience greater market performance since investors recognize and reward performance stability [Shaked 1986].

R elatedly, greater spread across international markets reduces the risk profile of the corporation's overall portfolio of business units, which in turn should have a salutary effect on corporate performance [Caves 1982; Rug man 1979]. Second, international diversification may yield cost advantages by allowing the firm to expand in its domain of distinctive competence and boost production economies without resorting to product diversification [Buhner 1987; Hirsch 1976]. This also allows cross-subsidization between markets [Oh mae 1989 a, b]. Third, market imperfection theory suggests that multinationals can exploit their home monopoly advantage (e.

g. , intangible, firm-specific assets such as technology and brand name recognition) by increasing their international presence [Pa lich 1994]. Finally, international diversification can boost market power by allowing the firm to arbitrage tax regimes [Agm on and Lessard 1977; Lessard 1979], obtain more accurate environmental information [Vernon 1979], and raise barriers to entry [Pale pu 1985]. The hypothesis that international diversification and firm performance should be positively related has been tested in numerous ways such as tracking company performance longitudinally as global expansion occurs (e.

g. , Smith and Zeithaml [1993]), comparing the performance of two or more groups of firms differing in their international involvement (e. g. , Michel and Shaked [1986]), and examining the regression effects of foreign involvement on firm performance (e. g.

, Kim, Hwang and Burgers [1989]). Unfortunately, research findings have been contradictory, suggesting that other factors may be responsible for the observed results. For example, Grant [1987], Grant, Jammin e and Thomas [1988], and Geringer, Beamish and d aCosta [1989] report a positive relationship between international diversification and firm performance, whereas Michel and Shaked [1986] found a negative relationship between these variables. Further, Shaked [1986], Buhner [1987], and Kim et al. [1989] report nonsignificant or equivocal support for the proposition that firm performance is a positive function of international diversification. In a recent review of this literature, Rama swamy [1993: 142] concluded that "despite the theoretical consensus about the benefits of operating overseas, empirical research has only provided a mixed bag of results at best." One glaring gap in these studies is a failure to consider the impact of cultural diversity -- not just the extent of international diversification -- on the performance of MNEs.

This may contribute to the mixed results reported in the literature. For instance, Geringer et al. [1989] found a curvilinear relationship between international expansion and firm performance. That is, firm performance begins to suffer beyond an optimal level of global involvement. While not tested in their study, the authors implied that this phenomenon may be explained in part by the difficulty of managing higher levels of cultural diversity For reasons discussed next, high cultural heterogeneity in MNE's global portfolio of business units may offset the purported economic benefits of international diversification. Cultural Diversity and Production Synergies.

General management expertise and technical know-how are more difficult to exploit when differences in cultural contexts make activity sharing and synergy formation among business units less efficient [Bartlett 1986; Bartlett and Ghosh al 1992; Jain 1989]. For example, some have suggested that cultural context plays an important role in the transfer of technology between business units [Keller and Chinta 1990; Snodgrass and Se karan 1989]. Empirical research by Davidson and McFetridge [1985] supports the notion that cultural relatedness enhances the flow of technological know-how in transnational exchanges and promotes activity sharing among business units of the global firm. Studying 1, 226 intra firm and market technology transfers carried out by thirty-two American multinationals, they found that similarity of language and religion between countries is positively associated with internal technology transfer. More specifically, these American firms were more likely transfer technology between home and foreign divisions when the receiving country was predominantly English-speaking and Protestant or Roman Catholic. Cultural Diversity and Innovation.

Innovation within the global firm may be impeded by cultural barriers. Innovation and its diffusion are facilitated by the presence of "champions [who] break or modify existing hierarchy and protect individuals from the hierarchy when they do break such routines... [which] makes it possible to keep innovation from being stymied by organizational rules, routines and standard operating procedures" [Venkat raman, MacMillan and McGrath 1992: 487]. Shane [1995] empirically explained differences in innovation championing roles across a large number of countries using Hofstede's cultural indices. Based on these findings, he suggests that cultural barriers may slow down the transfer of organizational innovations from one unit to another of a multinational firm. Cultural Diversity and Technology Implementation.

Effectiveness of technology implementation may also be influenced by cultural factors. For example, Heiko [1989] observes that the Just-In-Time (JIT) method of inventory management has been well received in Japan, leading to substantial savings, yet it has produced disappointing results in other countries. He attributes this to favorable cultural conditions that are unique to Japan, such as concern for space, preference for visual vs. written illustrations, and a deep group-oriented devotion to duty, all of which match the requirements of JIT techniques. Heiko [1989: 320] concludes that "these observations illustrate how Japanese culture provides an environment and context in which the Just-In-Time approach grows and flourishes." Thus, the more complex the cultural landscape facing a firm, the less effective it becomes to implement technology on an organization wide basis. This may lead to either higher customization expenses (to match technology to specific cultural contexts) or to greater opportunity costs by not adopting the latest techniques for fear that the results may be uneven across various units [Klein and Ralls 1995].

Cultural Diversity and Organizational Transformation Processes. Culturally related international diversification may result in more efficient utilization of labor by simplifying organizational transformation processes. Operations serving culturally related markets often produce the same (or at least very similar) products; they also tend to manufacture all products in the same way (e. g. , Japanese and Korean firms often emphasize quality for differentiation) [Keller and Chinta 1990].

From a human resource perspective, this strategy can lower labor costs and reduce training expense. Due to consolidation, such operations are better positioned to implement techniques such as material requirements planning to further increase labor productivity [Plenert 1990]. The culturally related firm is able to exploit this form of horizontal integration because the variety of product offerings is small compared to the multinational that serves several disparate markets with a complex array of products. Cultural Diversity and Market Response. Many have pointed out that cultural differences can lead to unique consumer preferences requiring customization of the marketing mix and function to promote product demand (e. g.

, Bartlett [1986]; Beamish, Killing, Le craw, and Morrison [1994]). Therefore, divisions in distinct but culturally related countries (e. g. , the United States and Canada) can more successfully share market activities and know-how than those in culturally unrelated countries (e. g. , the United States and Indonesia).

Greater ability to cross-sell products in culturally related markets also reduces the information gathering expense and uncertainty associated with targeting markets that are totally unrelated [Takeuchi and Porter 1986]. For instance, divisions in culturally related countries may find it expedient to share market research efforts, sales forces, order processing, service networks and the like.