When Do Firms Divest Foreign Operations?

Extant literature on divestment has repeatedly found that firms are likely to divest their poorly performing operations. In this paper, I consider how product market relatedness and geographic market differences in growth, policy stability, and exchange rate volatility can moderate the negative relationship between performance and divestment. Results from a comprehensive panel of U.S. multinational corporations (MNCs) reveal that conventional arguments about poor performance hold for both related and unrelated firm operations in countries characterized by low growth, policy stability, and exchange rate stability. However, the results also show that there are significant differences across the divestment decisions of firms for their related and unrelated foreign operations in countries characterized by high growth, policy instability, and exchange rate volatility. Although poor performance has been called the most significant predictor of divestment, this paper considers how interactions across multilevel factors influence the divestment decisions of firms and reveals how U.S. MNCs respond to both product and geographic market characteristics when making divestment decisions for their foreign operations.