Performance Effects of Divesting Foreign Production Affiliates: A Network Perspective

The goal of this study is to examine the short-term performance effects of a firm's decision to divest foreign affiliates that are part of an integrated international production network. Previous literature stresses positive investor reactions toward divestment announcements in the short run. Stockholders seem to expect positive long-term performance effects from refocusing strategies. When evaluating the actual financial consequences of divestments, however, it is unclear whether the benefits of divesting unprofitable production locations will outweigh the costs that arise from withdrawal in the short run. By evaluating outcomes of the remaining network, this study suggests that withdrawing countries from a production network leads to an immediate decline in performance. Efficiency gains that result from more favorable labor cost conditions across the remaining locations, on the other hand, can mitigate the negative performance effects of divestments. A panel analysis of 631 foreign production networks maintained by German manufacturing firms supports the hypotheses.