Prior research has shown mixed findings on the relationship between international diversification and a firm's innovation performance. Talcing a knowledge-based perspective and drawing on the learning theory and organizational diversity literature, this thesis argues that this could be due to the confusion of three effects of international diversification, i.e. the positive effect of market variety (the extent to which a firm's activities spread over many geographically defined markets), the negative effect of market separation (the dissimilarity between these different geographically defined markets), and the negative effect of market disparity (the inequality in the distribution of activities in different geographically defined markets). I argue that market variety provides fi...[ Read more ]

Prior research has shown mixed findings on the relationship between international diversification and a firm's innovation performance. Talcing a knowledge-based perspective and drawing on the learning theory and organizational diversity literature, this thesis argues that this could be due to the confusion of three effects of international diversification, i.e. the positive effect of market variety (the extent to which a firm's activities spread over many geographically defined markets), the negative effect of market separation (the dissimilarity between these different geographically defined markets), and the negative effect of market disparity (the inequality in the distribution of activities in different geographically defined markets). I argue that market variety provides firms with a better opportunity to build a diverse set of knowledge, the novel combinations of which giving rise to innovation. However, market separation and disparity tends to make substantial difficulties in knowledge transfer, sharing and integration. Two empirical studies with data on Chinese manufacturers with at least US$600,000 annual sales during 2005-2007 deliver support to the above arguments. The results show that firms competing in both domestic and overseas markets tend to be more innovative than firms competing in only domestic or overseas markets. The separation and disparity between domestic and overseas markets tend to reduce the positive effect of market variety. Firms with balanced sales in less separated domestic and overseas markets benefit most in innovation performance. High absorptive capacity may help firms overcome some difficulties in knowledge transfer, sharing and integration caused by market separation.

Key Words: international diversification, emerging economy, innovation, market variety, market separation, market disparity, absorptive capacity