Effectiveness of Diversification Strategies for Ensuring Financial Sustainability of Construction Companies in the Republic of Korea

Manchun Han, Sanghyo Lee and Jaejun Kim
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Manchun Han: Department of Architectural Engineering, Hanynag University, 222, Wangsipri-ro, Sungdong-gu, Seoul 133-791, Korea
Sanghyo Lee: Division of Architecture and Civil Engineering, Kangwon National University, 346, Jungang-ro, Samcheok-si, Gangwon-do 25913, Korea
Jaejun Kim: Department of Architectural Engineering, Hanynag University, 222, Wangsipri-ro, Sungdong-gu, Seoul 133-791, Korea

Sustainability, 2019, vol. 11, issue 11, 1-19

Abstract: Construction companies recognize diversification as a strategy for ensuring financial sustainability. Hence, the aim of this study was to analyze the dynamic relationship between business diversification and business performance of construction companies using the vector error correction model. The expected default frequency, diversification index, domestic construction order, international construction order, gross Domestic Product, Korea composite stock price index, and interest rate were defined as analytical variables. To derive implications for diversification strategies, construction companies were classified into two groups according to the diversification level, and analyzed from the first quarter of 2001 to the fourth quarter of 2017. The results confirm that the dynamic relationship between the diversification strategy and business performance depends on the diversification level of the company. For changes in the markets entered for diversification, construction companies showed different ways of executing the diversification strategy depending on the group; this was partially because of differences in internal and external capabilities of companies, and each company responded differently to market changes. To ensure financial sustainability of a construction company through effective diversification, various conditions must be considered before deciding what impact the diversification strategy could have on the business performance of the company.

Keywords: financial sustainability; effectiveness; diversification; business performance; Vector Error Correction Model; Kealhofer; McQuown and Vasicek (KMV) model; Korea (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2019
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