Economies
of scale or scope must be balanced with dis-economies of size or complexity,
which may explain why some studies find a trade-off between international expansion
versus product diversification. When costs and benefits are not carefully
balanced, the consequence is a diversification discount: more diversified firms
being associated with lower shareholder value. When managers are not well
aligned with shareholders, they may be interested in more diversified and
larger companies to benefit from empire building, beyond the optimal size from
the point of view of firm value. However, the diversification discount may also
show up in data sets because the characteristics that push a firm towards
optimal diversification are characteristics that lower firms’ profits (such as
more product market competition in the home market).
Some
studies hypothesize and find evidence consistent with a non-linear relationship
between geographic diversification and performance, probably S shaped, where
the success of the strategies is related to the experience of the firm, the
business cycle and the evolution of technology and competition.
In
industries where at least some segments are subject to regulation or at least
to license conditions, geographical diversification strategies are mediated by
regulation. Regulatory policies may constrain the international activities of
regulated incumbents, and also the entry of foreign operators. The same firm
operating in different markets may face different regulatory regimes, thereby
sending the best managers and other assets where the regulatory regime allows
higher profits.
Some
scholars have also pointed out the specific characteristics of the market for
corporate control in regulated industries, which also shapes the structure and
performance resulting from internationalization. On the one hand, deregulation
and regulatory reform have been found to be associated with mergers and
acquisitions waves, with the persistence of regulatory elements constraining
the efficient performance of the market for corporate control. On the other
hand, the behavior of some incumbents has been used to illustrate the free cash
flow theory, by which managers of sectors with limited growth opportunities in
their core segments but stable cash flows tend to re-invest in new but not
necessarily profit-maximizing markets instead of giving back the cash-flows to
shareholders.