The effects of international diversification on the link between product diversification and performance in a boom and bust cycle: Evidence from Spanish firms (1994–2014)

This study examines the individual effects of product diversification on performance and the moderating effects of international diversification on the product diversification–performance link in the context of a boom and bust cycle. Most prior research on firm strategies largely neglect the business cycle. We use data on a large sample of Spanish manufacturing firms from 1994 to 2014. In this period, the Spanish economy experienced a boom period (1994–2008) and a bust period involving a severe economic crisis (2009–2014). Our study highlights the important role of each stage of the economic cycle. Specifically, with respect to product diversification, our findings show that in a boom, moderate diversifiers obtain better profitability levels than their highly diverse or limited diversification counterparts do. In contrast, during an economic downturn, moderate and high diversifiers can be equally effective up to some point of optimization. Our findings also reveal a negative and significant effect of internationalization on profitability, independent of the stage of the economic cycle. Product and international diversification are complementary strategies during a period of economic growth when firms opt for moderate levels of product diversification. Meanwhile, when firms choose high levels of product diversification, both types of strategies are complementary during the boom cycle, but substitutive during the bust cycle.