Diversification Strategies and Firm Performance: A Sample Selection Approach

Abstract

Abstract:This paper is based upon the assumption that firm profitability is determined by its degree of diversification which in turn is strongly related to the antecedent decision to carry out diversification activities. This calls for an empirical approach that permits the joint analysis of the three interrelated and consecutive stages of the overall diversification process: diversification decision, degree of diversification, and outcome of diversification. We apply parametric and semiparametric approaches to control for sample selection and endogeneity of diversification decision in both static and dynamic models. After controlling for industry fixed-effects, empirical evidence from firm-level data shows that diversification has a curvilinear effect on profitability: it improves firms' profit up to a point, after which a further increase in diversification is associated with declining performance. This implies that firms should consider optimal levels of product diversification when they expand product offerings beyond their core business. Other worth-noting findings include: (i) factors stimulating firms to diversify do not necessarily encourage them to extend their diversification strategy; (ii) firms which are endowed with highly skilled human capital are likely to successfully exploit diversification as an engine of growth; (iii) while industry performance does not influence profitability of firms, it impacts their diversification decision and degree.

Efficiency or bounded rationality? Drivers of firm diversification strategies in Vietnam

“…Thus, we have enough evidences to claim that those firms following the herd will perform less efficiently than their counterparts. When the SIC-based index is used, results are consistent with our previous studies (Santarelli and Tran, 2013). Generally, highly focused firms tend to have lower profitability or, equivalently, greater diversification raises profitability.…”

“…TFP is predicted from the production function in which sales is the production output; whereas age and capital are treated as state variables, labour and materials are freely variable inputs, and investment are taken as the proxy variable. The market share of the top four companies in the four digit industry ∑ , : market share held by the largest 4 firms in an industry; is the market share of the i th firm Weiss (1974); Montgomery (1985); Schmalensee (1989) Hoskisson et al (1993); Markides and Williamson (1996), Palich et al (2000); Santarelli and Tran (2013 …”

“…There has been a common pathway among Asian developing countries, particularly China, India, South Korea and Vietnam, which transformed state-owned firms into large diversified firms as the main route of growth (Economist, 1997a(Economist, , 1997b(Economist, , 1997cLoc et al 2006). However, recent empirical findings show that in Vietnam, smaller (and younger) diversified entrepreneurial firms are more successful than their larger counterparts (Santarelli and Tran, 2013). Diversification decisions can be driven either by efficiency/market power motives or by opportunism (Nachum, 1999;Montgomery, 1985;Dawid and Reimann, 2011).…”

“…As the social capital from weak ties, such as business networks, business associations and groups, is strong and pervasive, firms perceive that it may be less risky to follow their network partners or their competitors in entering a new market (Santarelli and Tran, 2013).…”

Innovative strategies and firm growth: evidence from selected fast moving consumer goods firms in Lagos state, Nigeria

“…Sindhu, Haq, and Ali (2014) in their study on diversification and firms' performance noted that diversification strategies enhance performance of Pakistani firms. Other studies also share this view(Boz, Yigit, & Anil, 2013;Nwaeke & Wodu, 2012;Santarelli & Tran, 2013;Asman, 2013;Mwangi, 2016). Others likeOnyali and Okerekeoti (2018) look at the issue of performance from another perspective.…”