The Effects of Foreign-based Competition on Diversification Strategy and Firm Performance

The intensifying global competition since the late 20th century mostly comes in a form of increasing import to the domestic firms. We label foreign competition in the form of imports foreign-based competition. That is, foreign-based competition refers to the competition from foreign firms in the form of imports of foreign produced goods. This research was conducted with the following objectives; to empirically test the effects of the foreignbased competition in an industry on a firm’s decision of the diversification strategy and to provide a theoretically integrative framework including the determinants and results of the diversification strategy. The research model builds upon the structure-conduct-performance behavior. The structure is the foreignbased competition and the conduct is the business and international diversification in this study. However, not every firm in an industry which is under same industrial structure behaves equally. Therefore, three moderating variables are added to the model. They are industrial attractiveness, technology-related assets and marketing-related assets. Accordingly, the ten hypotheses were suggested. First of all, the foreign-based competition is expected to affect the degree of business diversification negatively but the degree of international diversification positively. However, the relationships may change due to some moderating effects. If the core business of a firm is more attractive and the firm is endowed with technology-related and marketing-related assets, the negative effect of the foreign-based competition is more stronger. On the other hand, the relationship between the foreign-based competition and the degree of international diversification is more positive when the core business industry of the firm is less attractive and the firms have more technology-related and marketingrelated assets. In addition, the business and international diversification are expected to have the nonlinear and inverted U-shaped relationships with the firm performance. The hypotheses were tested for a sample of 180 manufacturing firms publicly listed in the Korean Stock Exchange in September 2006 and the 540 pooling data of the sample were used from 2003 to 2005. As the results of path analysis, H2, H2a and H2c were supported. Also, the results of regression analysis evidenced the H3, that is, the inverted U-shaped relationship between the degree of business diversification and the firm performance. To summarize the implication from the research results, first of all, Korean manufacturing firms cope with the intensifying foreign-based competition in their core business through diversifying internationally. Second, the less attractive their core business industry, the higher the degree of both business diversification