THE NONLINEAR RELATIONSHIP BETWEEN INTERNATIONAL DIVERSIFICATION AND IDIOSYNCRATIC RISK

Abstract

This study explores the relationship between international diversification and firm-specific risk through a quantitative approach. Data of 435 firms in the period 2017–2020 were analyzed using descriptive statistics, correlation analysis, and two-stage regression using the Heckman (1979) procedure. The results show a nonlinear inverted U-shaped relationship between the degree of international diversification and firm-specific risk, implying that firms should persist in pursuing this strategy. Initially, risk increases due to lack of experience in new markets; however, over time, firms can better control risks, improve revenues, and increase cash flow flexibility due to the benefits of international diversification.