JOURNAL ARTICLE | Strategic Management Journal | | May 1993
Multinationals' Diversification and the Risk-Return Trade-off
This paper advances a theoretical rationale to explain Bowman's paradox (1980) that firms with high returns can have low risk. Drawing on international management research, it is argued that global market diversification, which provides multinational firms with three distinct options and opportunities over domestic firms, can explain the paradox. It is also argued that no strong theoretical rationale exists in support of either related or unrelated product diversification generating such a favourable risk-return profile. By integrating both the product and the global market dimension of diversification into these analyses, and by controlling for the industry effect, this paper sheds new light on the relationship between corporate diversification and the risk-return tradeoff. The results based on the diversification experiences of 125 multinationals, reveal the strikingly important, though so far overlooked, role that global market diversification plays in the joint management of corporate risk and return.