States of the Economy and Geographic Investment Decisions

We examine the impact of economic conditions on firm performance after geographic expansions and divestures. We conjecture that different economy conditions during which a firm expands in and out of geographic territories affect the firm's ability to transform its resources into competitive edges. The difference in the ability of a firm to convert resources to advantages, in turn, leads to variations in operating performance subsequent to geographic expansions and divestures. We conduct empirical tests of our hypotheses using corporation self-disclosed segment data from 1979 to 2008 from COMPUSTAT. We find that, during weak economic cycles, geographic expansions result in sustained long-term profitability. Specifically, firms' geographic expansion decisions contribute 5.4% and 3.9% per year to industry-adjusted annual return on assets (ROA) over 4- and 5-year periods, respectively. On the other hand, geographic divestures enacted during a weak economy do not help improve firm performance. Moreover, both strong and weak economic conditions enhance performance of geographic expansion over two years but have no long-term effects. Finally, the state of the economy during which time geographic divesture takes place does not affect subsequent operating performance