Why Do Firms Divest?

In this paper, I examine how lower-cost production and new market opportunities influence the divestment decisions of firms. I argue that lower-cost production and new market opportunities in foreign markets can provide a better use of existing firm resources and posit that these opportunities are likely to influence firm divestment of home-country operations. The empirical results from a panel of 190 U.S. firms over a 20-year period (1981–2000) show that lower-cost production and new market opportunities influence the divestment decisions of firms. However, the results also reveal several interesting moderating influences on the hypothesized trade-offs and differences across the growth strategies of firms in low- and high-research and development intensive industries. By considering how and when investment in lower-cost production and new market opportunities impacts firm divestment decisions, this study examines divestment not only as a choice managers make when dealing with poor or struggling operations, but also as a response to better opportunities for firm resources in other markets. By focusing on the trade-offs managers make across product and geographic markets, this paper examines the role divestment can play in firm growth and expansion strategies.