Department of Economics, Michigan State University, U.S.A.

Darden Graduate School of Business Administration, University of Virginia, U.S.A.

This paper analyzes the relationship between product and geographic diversification and profitability in leading German and UK firms. Using a unique and disaggregated dataset, we first link a firm’s level of product and geographic diversification to both industry and firm-specific factors. The impact of the Single European Market and industry type are found to be important in explaining diversification levels. Secondly, during the early 1990s, we find evidence of a curvilinear relationship between profitability and product diversification for German firms but between profitability and geographic diversification for UK firms. Diversification and multinationality are found to be complementary strategies for German firms but substitute strategies for UK firms.

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