Diversification and Market Entry Choices in the Context of Foreign Direct Investment

Multinational enterprises consider many factors when making decisions in the context of foreign direct investment (FDI). In deciding what to produce, the multinational enterprise (MNE) must decide whether to diversify or to concentration on its main line of business. This paper offers insights into influences on this choice, and identifies a number of conditions under which diversification is more likely to be chosen. Factors affecting the foreign entry mode decision are also analyzed. The international business literature has generally treated these strategic choices as independent. This paper introduces a more realistic selection model, in which the diversification choice and the entry mode choice are made sequentially and are therefore related. The model is tested using a data set of FDI into the United Kingdom by MNEs in engineering and related industries. The analysis indicates a strong relationship between the diversification choice and the entry mode decision. In virtually all cases, the statistical significance of the selection model is higher than that of the independent model, indicating an improvement over previous research. Overall, the choice of a diversification strategy has a significant positive effect on the probability of greenfield entry. The paper also identifies a number of managerially relevant factors affecting these relationships.