A knowledge-based perspective on corporate growth: Entry, exit, and economic performance during 1981-1989

Understanding the process by which a firm grows over time is the first step in advancing the field of corporate strategy. The main objective of this study is to propose a general theoretical framework to facilitate an understanding of the firms' evolution. After reviewing several traditions in the theory of the firm and organizational learning, we propose a new perspective of a firm which views a firm as an accumulation of knowledge. A firm in our theoretical framework is engaged in continuous search and selection activities in order to improve its knowledge base and thereby improve its performance. This general framework is applied to the context of corporate growth. Entry and exit activities are understood as search and selection undertaken by the firm to improve its performance. One of the compelling features of this framework is that the firm is an entity which performs experiments to develop its knowledge base. For instance, a firm may initiate several diversification experiments over time to stockpile a knowledge base. Based upon this learning, it can accumulate the capability to select the best diversification opportunities and the appropriate model of entry over time. Such experimentation is accompanied by application of existing knowledge base. This study is very empirical in nature. This study traces all entry and exit activity during 1981-89 of virtually all publicly traded manufacturing firms in the United States. We found strong supports for most of our hypotheses. We found that poor performance may lead to exit but not necessarily incur new entry. Applicability of the firm's knowledge base seems to play a very important role in predicting which business to enter or exit. Firms are more likely to enter businesses of similar human resource profiles and more likely to divest lines of business of different profiles. Also, firms are generally divesting businesses of small market share and small sized business. Corporate level analysis shows that such entry and exit contribute to improve the profitability of a firm. However, firms which continue divesting newly entered business have depressed their profitability due to repeated mistakes in experimentation.