Firm performance and international diversification: The internal and external competitive advantages

This paper examines (a) the relation between the institutional framework of a firm's home country and the firm's development of its internal and external competitive advantages, and (b) whether and if so, how a firm's preference for, or dependency on, either internal or external capabilities affects the relation between international diversification and firm performance. Based on a sample of more than 1,500 manufacturing firms in Germany, France, the United Kingdom, Spain, and Denmark, the results show that countries' institutional factors (i.e., capital markets, financial intermediaries, and skilled workforce) significantly impact both internal and external competitive advantages of the firms. The paper also sheds light on how the mix of internal and external competitive advantages affects the relation between international diversification and firm performance. Accordingly, the results support an S-shaped relation structured in three different phases, irrespective of the firms' orientation toward internal or external capabilities. (C) 2010 Elsevier Ltd. All rights reserved.