Intangible assets and firm diversification

Purpose – To re‐examine empirically internalisation and transaction cost theories of firm FDI. Design/methodology/approach – Empirical analysis based on cross sectional multivariate regressions and the Fama‐French three factor event study procedure. In addition to the key explanatory variables the paper introduces and models several important control variables. Findings – The paper finds evidence consistent with the internalisation and transaction cost hypotheses. Firms classified with internalisation advantages earn event period abnormal returns of 6.84 percent above firms that are classified without such advantages. In support of transaction cost theory the paper finds that FDIs generate an average abnormal event period return of −2.36 percent. Further, in line with transaction cost theory firms classified with intangible asset advantages also tend to engage in the more complex forms of foreign and industrial diversification. Research limitations/implications – The paper does not determined if the effect linked to the possession of intangible asset advantages is temporary or permanent. FDI is costly, but firms that enjoy high market valuations tend to do well in M&A or FDI activity. Originality/value – The study provides new and strengthened support for internalisation theory. The study provides new evidence in support of transactions cost theory.