Governance Mechanisms, Prior International Diversification and Organizational Inertia: A Longitudinal Test of Large United States Firms

We draw from agency theory and take into account organizational inertia to argue that, over time, firms determine their future international strategy based on the level of current strategy because their commitments and investments become institutionalized into daily routines, lessening decision makers’ influence. We analyze a data set of 123 firms over the years 1991, 1994, 1997, and 2000 by use of the generalized method of moments, a dynamic panel estimation method, which reduces the probability of presenting inconsistent and biased findings and avoids problems of endogeneity.  Results strongly support the argument based on organizational-inertia perspective that the level of international diversification in large U.S. firms is primarily a function of their previous levels of international diversification.