Resource Allocation, Level of International Diversification, and Firm Performance

What is under control of the firm, what can be utilized in the production of goods or services by the firm management, and what can enable the firm to "conceive of and implement strategies" are within the frontiers of the firm resources. Barney defined the resources as scattered heterogeneously among firms in a market and whose supposed nature is of imperfect imitability. In this regard, the complexity and ambiguity of employment of resources by a firm create barriers for other competitors to imitate. This perspective indicates the fact that there is a unique and optimum set of resources for an entity to achieve efficient and effective outcomes. Another study by Markides and Williamson, found that not only having strategic assets help firms perform better but also building up strategic assets faster in a competitive environment would lead to superior performance. Assuming the necessary importance of tangible assets to the firm, the intangible resources, such as knowledge, are also imperative essences of the firms when integrated and utilized within the firm strategy. Similarly, such resources create competitive advantage in the global context when the transfer of knowledge to other countries is maintained in an efficient way. An earlier study found that industry attractiveness is not the focal point for a diversifier unless the diversifier is efficient.

From a transaction cost point of view, engaging into multiple markets in different contexts of countries which are new to the firm would require better communication and network skills to handle the unfamiliarity of the new markets. Thus, the success of an international firm is tied into the efficiency of benefiting the opportunities and implementing the know-how in a global market. Besides, the international diversification has implementations and positive repercussions on the extent of innovation experience that the firm is undertaking. Therefore, increasing the shareholder wealth through international diversification is evidenced in a study encompassing West German corporations.

The intentions of diversifying internationally are different than that of diversifying domestically. The international diversification strategy is thereupon employed when the firm is basically 'pulled' by the external factors that could allow the exploitation of the prospective global markets, rather than risk reduction purposes. Domestic firms may move into the international arena whenever the management sees the domestic market becoming saturated. On the contrary, from a more financial perspective, the risk reduction is proposed to be a desirable and feasible goal of international diversification.