The Relationship Between Diversification and Performance in Export Intermediary Firms
| Author | George I. Balabanis |
| Published date | 01 March 2001 |
| DOI | http://doi.org/10.1111/1467-8551.00186 |
| Date | 01 March 2001 |
Introduction
Diversification is one of the most dominant con-
cepts in the economics, finance, strategic manage-
ment and marketing disciplines. Diversification
has been used to explain firms’ economic per-
formance, financial efficiency, market dominance
and risk reduction. Although most of the avail-
able research focuses on large industrial firms,
diversification seems to be important for other
types of firms as well. For example, Nayyar (1990)
demonstrated that diversification is equally
important for service firms. A set of the available
diversification studies tries to explain the business
success of the large Japanese and other South
East Asian international intermediaries known
as general trading companies (GTCs) (Cho,
1987; Tsurumi, 1980). Diversification is so deeply
ingrained in these types of intermediaries that
it has become an integral part of their identity.
The prefix ‘general’ in their appellation is used
to demarcate them from other, less diversified,
trading companies.
The export success of the Japanese GTCs in the
1960s and 1970s prompted many countries (such
as South Korea, Brazil, Turkey and the USA) to
introduce or encourage the development of their
national versions of GTCs. Although diversification
is thought to be one of the main factors contributing
to the success of GTCs (Cho, 1987), empirical
research in that area is scarce and confined to
the large South East Asian GTCs (Ha, 1990;
Sarathy, 1985). Moreover, despite the plea of a
number of researchers (Bello and Williamson,
1985) to examine how diversification affects other
smaller export intermediaries’ performance, there
has been little response from the research com-
munity. Existing, mostly descriptive, studies
(Brasch, 1978, 1981; Haigh, 1994) also show that
small and medium-sized export intermediaries
(EIs) are not specialized as they were assumed to
be, and that diversification plays an important but
still uncharted role in their operations. Based on
the above, the main purpose of this study is to
examine how diversification affects different
aspects of an export intermediary’s performance.
As research in the area of EI diversification is
limited, the study will focus on the theoretical
framework developed by Cho (1987).
In order to understand the impact of diversi-
fication on different aspects of an EI’s perform-
ance, it is necessary first to define EIs and then to
British Journal of Management, Vol. 12, 67–84 (2001)
The Relationship Between
Diversification and Performance
in Export Intermediary Firms
George I. Balabanis
European Business Management School, University of Wales, Swansea, Singleton Park, Swansea SA2 8PP, UK
email: g.balabanis@swansea.ac.uk
The study examines the impact of product, functional and geographical diversification
on the sales, exports and profitability of export intermediaries (EIs). It is based on a
mailed survey of a sample of 135 British EIs. The results indicated that product and
unrelated functional diversification are important to an EI’s export stability. EIs that
tend to carry undifferentiated products also exhibit more stable export sales. Although
geographical diversification itself was not found to affect performance, focus on the
economically developed countries seems to be critical for an EI’s stability and growth
of sales and exports.
© 2001 British Academy of Management
examine the bases of their competitive advantage.
Export intermediaries (EIs) are firms that under-
take to perform all or a part of a domestic manu-
facturer’s downstream value-chain activities
(i.e. outbound logistics, marketing and sales and
service activities) in the international (non-home
country) markets. These two characteristics (i.e.
performance of downstream value-chain activities
and international market focus) are necessary for
a firm to be characterized as an EI. Moreover, to
separate EIs from other types of firms performing
similar functions, it is a necessary qualifying con-
dition that these activities constitute a firm’s main
(or core) business. Although no locational restric-
tions apply to this definition, the main focus of the
study is on home-based (i.e. UK) EIs. Similarly,
the ownership of the carried goods is not a neces-
sary condition for a firm to qualify as an EI. EIs
can act either as merchants (taking title or owner-
ship of the carried goods) or agents (not taking
title or ownership of the carried goods) or as a
mixture of both. Based on the above definition, it
appears that EIs have to compete with all firms
that can perform all or a part of these activities
in international markets (such as manufacturers,
other EIs, foreign distributors, resellers and the
like). Thus, EIs’ advantage over the above category
of competitors will be to perform these activities
at a lower cost (that is, more efficiently) or more
effectively than them (by adding value to those
activities or by differentiating them). The relevant
literature (Cho, 1987; Eli, 1990; ESCAP/United
Nations, 1984; Ha, 1990; Kojima and Ozawa,
1984; Roehl, 1982, 1983; Sarathy, 1985; Shin,
1989; Tsurumi, 1980; Wortzel and Wortzel, 1983;
Yamawaki, 1991; Yoshino and Lifson, 1986) sug-
gested that diversification can be one of the bases
of their competitive advantage. However, as will
be seen in greater detail in the rest of the paper,
an EI’s competitive advantage appear to be more
pronounced when its diversification activity focuses
on specific categories of geographical or product
markets (ESCAP/United Nations, 1984 and
Roehl, 1982).
The above arguments clearly suggest that a
relationship between an EI’s performance and
diversification exist. The main objective of this
paper is to examine the nature and direction of
this relationship. In order to achieve this objective
the paper is formatted as follows. First, the
definition of both diversification and export inter-
mediaries is presented. Second, the theoretical
arguments supporting a performance–diversification
link in the EI context are discussed and a set of
research hypotheses is developed. Then, the meas-
ures used to estimate diversification and perform-
ance, as well as the method used to collect data, are
presented. Finally, the results, their implications
and limitations are discussed.
Definitions
Export intermediaries
The term ‘export intermediary’ (EI) was used by
De Noble, Castaldi and Moliver (1989) to describe
a number of middlemen (export management
companies and export trading companies) that
perform similar functions. As mentioned earlier,
an EI’s main business is to undertake all or parts
of a domestic manufacturer’s downstream value-
chain activities in international markets.
Given the broadness of an EI’s scope of
activities performed and markets served, a variety
of terms have been used to describe them. For
example, terms such as trading companies, export
‘trading companies’, ‘export management com-
panies’ and ‘export merchants’ are used inter-
changeably to distinguish EIs operating in different
contexts. However, this proliferation of terms can
be attributed to historical or legislative circum-
stances, rather than a systematic and scientific
classification effort. In order to understand better
their operations, it seems important to take a
broader view of the operations of these organ-
izations that goes beyond their superficial labelling
differences. As shown by De Noble, Castaldi and
Moliver (1989) the term EI can provide such a
unifying research framework.
Diversification
Traditionally, diversification refers to the involve-
ment of a firm in markets (or industries) beyond
the market (or industry) boundaries in which
originally belongs (Berry, 1975; Gort, 1962).
However, Ramanujam and Varadarajan (1989,
p. 525) in a review of the literature, concluded
that diversification is ‘the entry of a firm or a
business unit into new lines of activity, either by
processes of internal business development or
acquisition, which entail changes in its admin-
istrative structure, systems, and other management
processes’. There is a multitude of definitions and
68 G. I. Balabanis
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