Why do multinationals divest overseas operations?

Introduction

Multinational corporations divest overseas operations for a number of reasons. For example, over the years, a number of multinational corporations from the UK have divested their operations in the US. These have included Tesco and Sainsbury’s in food retailing. Other industries such as fashion retailing have also seen companies make a hasty and dramatic retreat from overseas markets they had previously expanded into, such as Marks and Spencer also in the USA. The reasons for divestment are many and variable. They include lower cost production and new market opportunities elsewhere (Berry 2009), poor performance (Hoskisson et al 1994), exchange rate volatility and geographic market growth differentials (Berry 2013; Shaver et al 1997) as well as a refocus on a multinational’s core activities (Chang and Singh 1999). Often, a divestment decision can come to a trade-off between markets. Some of these reasons are examined in more detail in the next section.

Why multinational firms divest overseas operations?

Divestment and the reasons why firms do it have been studied by a number of scholars. In their study of 59 divestments carried out by US MNCs between 1975 and 1980, Duhaime and Grant (1984) found that three factors seemed to play a major role in the decision to divest. These were; low return on equity, poor performance and detraction away from the parent’s core strength and competency. Poor performance has also been supported by other scholars (Hoskisson et al 1994; Berry 2009; Hitt and Ireland 1986).

According to Berry (2009), many firms still have to make trade-offs regarding which markets represent the best use of their resources and capabilities. This can simply be a question of divesting in poorly performing markets or poorly performing operations (Hoskisson et al 1994) and investing in other products or geographic markets. So a multinational firm can decide to divest an existing and ineffi