Efficiency of Corporate International Diversification: Evidence from Developing African Economies

Corporations pursue international diversification as a prudent expansionary strategy to augment firm/market value. Notwithstanding its beneficial result in increasing firm value, studies have shown the potential detrimental effects international diversification can have on corporate performance, hence shareholders’ value. With its improving geopolitical stability and favorable investment policies, developing African economies over the past two decades have been the target of international diversification by foreign corporations seeking diversified growth. This study, using empirical data under the generalized least squares (GLS) estimates under fixed effect assumption, analyzes the operational and financial performance of foreign corporations in Africa. Using secondary data of published audited financial statement between 2010 to 2017, 10 sampled foreign companies with wholly own subsidiaries in Africa where studied, with the research aim of analyzing the relationship between corporation's performance and its degree of internationalization (DOI) in Africa. The study findings reveal that, in the short to medium term, current operational performance of MNCs in Africa declines, as measured by ROCE, due to market penetration and development complexities. Further, findings indicated that corporate cost of capital has a direct increasing relationship with the degree of internationalization Africa, driven by an increasing cost of debt and common equity. Moreover, study result indicated a rise in corporation’s long-run market value expectation, as measured by Tobin Q, in relation to its degree of internationalization, attributable to the development of attractive investment projects in Africa, thereby gaining investors’ confidence, despite fall in current operation performance. The study findings contribute to the expansion of literature for prudent internationalization strategy formulation and implementation for shareholders’ value maximization.