The influential factors on the relationship between diversification strategies and firm performance : a study of Chinese publicly-traded tourism firms

Abstract

Although diversification, as a strategy, has been widely implemented by different firms in many industries, based on previous empirical studies, there is still no consensus on whether a diversification strategy enhances firm performance. This inconsistency may be caused by different firm-specific characteristics and firms being surrounded by different market environments. These aspects formed the motivation for conducting this research. This study focused on China's tourism industry in which product diversification has become a phenomenon whereby Chinese tourism firms operate their businesses in other industries. Understanding the effects of a product diversification strategy on the performance of tourism firms in China is necessary because it is important to establish whether this common strategy leads to better firm performance in a developing economy. This study examined both linear and nonlinear relationships between product diversification and firm performance and focused on a geographic diversification strategy as one of the moderators of the relationships. From the resource-based view, some organizational factors are also essential to the consequences of diversification, and there is a lack of empirical studies exploring the effect of organizational factors on the relationship between product diversification and firm performance. Therefore, this study aimed to investigate the effects of three selected organizational factors—product relatedness, the human capital of a firm, and the flatness in organizational structure—on the relationship between product diversification and firm performance. In total, 26 were selected for this study. Data were collected from the 2008-2015 annual reports of the selected firms. Two performance measures—return on assets (ROA) and Tobin's Q—were the dependent variables in the estimation models; product diversification, geographic diversification, product relatedness, human capital, structure flatness, and market structure were the independent variables. Additionally, firm size, firm age, debt ratio, and capital intensity acted as the control variables in the estimation models. The presence of significant linear and nonlinear relationships between product diversification and firm performance (measured by ROA and Tobin's Q) were supported by the findings of this study. The positive moderating effect of geographic diversification on the relationship between product diversification and Tobin's Q was also supported. The negative and significant moderating effect of product relatedness on the relationship between product diversification and Tobin's Q was supported too, which was contrary to the proposed hypothesis. Moreover, the factor of human capital was shown to have no effect on the relationship between product diversification and firm performance. Additionally, the positive effect of product diversification on Tobin's Q was found among the group of flatter firms, and the negative effect of product diversification on Tobin's Q was found among the group of firms with a more complex organizational structure. Lastly, the positive moderating effect of the market structure (measured by market concentration ratio) on the relationship between product diversification and firm performance (measured by ROA and Tobin's Q) was supported. This study enriched the existing literature on diversification in the tourism industry. The integration and application of the resource-based theory, modern portfolio theory, resource dependency theory, and the structure-conduct-performance (SCP) paradigm also contributed to the academic literature. The significant moderating effect of the market structure sheds light on a new nexus in the SCP paradigm. Through identifying the optimal levels of product diversification and finding the significant moderating effects of product relatedness, geographic diversification, structure flatness, and market structure on the relationship between product diversification and firm performance, this study can inform industry practitioners on ways to develop better practices.