The evidence from Canadian firms on multinational diversification and performance

The purpose of this paper is to identify the effects of multinational diversification on corporate financial performance. This issue is examined for Canadian firms by using four years of individual as well as pooled time-series-cross-sectional data for the years 1992-1994 and 1997. Using three distinct measures of financial performance and two measures of multinational diversification and controlling for size, leverage, growth, and efficiency, we replicate the procedures in prior studies to show that, in general, lower performance is associated with multinationality. However, when a nonlinear specification is used, a hurdle level for foreign assets deployment is identified. Prior to this threshold level, financial performance is inversely related to degree of multinational diversification, but beyond this level, the relationship is positive. We provide an explanation for this U-shaped relationship.