Chapter 8: International Strategy 263Many factors contribute to the positive effects of international diversification, such
as private versus government ownership, potential economies of scale and experience,
location advantages, increased market size, and the opportunity to stabilize returns. The
stabilization of returns through international diversification helps reduce a firm’s overall
risk.^126 Large, well-established firms and entrepreneurial ventures can both achieve these
positive outcomes by successfully implementing an international diversification strategy.
As described in an earlier example, FEMSA was using an acquisition strategy to increase
its international diversification. FEMSA’s financial results suggest that it has achieved
positive returns from this strategy.
8-6b Enhanced Innovation
In Chapter 1, we indicated that developing new technology is at the heart of strategic
competitiveness. As noted in our discussion of the determinants of national advantage
(see Figure 8.3), a nation’s competitiveness depends, in part, on the capacity of its indus-
tries to innovate. Eventually and inevitably, competitors outperform firms that fail to
innovate. Therefore, the only way for individual nations and individual firms to sustain a
competitive advantage is to upgrade it continually through innovation.^127
An international diversification strategy creates the potential for firms to achieve
greater returns on their innovations (through larger or more numerous markets)
while reducing the often substantial risks of R&D investments. Additionally, interna-
tional diversification may be necessary to generate the resources required to sustain
a large-scale R&D operation. An environment of rapid technological obsolescence
makes it difficult to invest in new technology and the capital-intensive operations
necessary to compete in such an environment. Firms operating solely in domestic
markets may find such investments difficult because of the length of time required
to recoup the original investment. However, diversifying into a number of interna-
tional markets improves a firm’s ability to appropriate additional returns from inno-
vation before domestic competitors can overcome the initial competitive advantage
created by the innovation.^128 In addition, firms moving into international markets are
exposed to new products and processes. If they learn about those products and pro-
cesses and integrate this knowledge into their operations, further innovation can be
developed. To incorporate the learning into their own R&D processes, firms must
manage those processes effectively in order to absorb and use the new knowledge
to create further innovations.^129 For a number of reasons then, international strate-
gies and certainly an international diversification strategy provide incentives for firms
to innovate.^130
The relationship among international geographic diversification, innovation,
and returns is complex. Some level of performance is necessary to provide the
resources the firm needs to diversify geographically; in turn, geographic diversifi-
cation provides incentives and resources to invest in R&D. Effective R&D should
enhance the firm’s returns, which then provide more resources for continued geo-
graphic diversification and investment in R&D.^131 Of course, the returns generated
from these relationships increase through effective managerial practices. Evidence
suggests that more culturally diverse top management teams often have a greater
knowledge of international markets and their idiosyncrasies, but their orienta-
tion to expand internationally can be affected by the nature of their incentives.^132
Moreover, managing the business units of a geographically diverse multinational
firm requires skill, not only in managing a decentralized set of businesses, but also
coordinating diverse points of view emerging from businesses located in different
countries and regions. Firms able to do this increase the likelihood of outperforming
their rivals.^133