Why strategic factor markets matter: “New” multinationals' geographic diversification and firm profitability

Abstract

This study examines firm profitability differences among “new” multinational enterprises ( NMNE s) pursuing geographic diversification into two distinct types of geographic locations based on the development of strategic factor markets. Building on strategic factor markets theory, we propose that firm‐specific advantages of NMNE s contribute differentially to firm profitability because they evolve differently given strategic factor market differences in host compared to home countries. Using a sample of K orean manufacturing MNE s during the 1993–2003 period, we find that geographic diversification into resource‐poorer host countries has a positive relationship with firm profitability, whereas geographic diversification into resource‐richer host countries has a U ‐shaped relationship with firm profitability. Our study demonstrates why strategic factor markets—an important and often overlooked contextual factor—matter in exploring rationales for geographic diversification . Copyright © 2014 John Wiley & Sons, Ltd.