A Re-Examination of Diversification and Firm Productivity

The advantages and disadvantages of diversification have been debated ad nausem by academics as well as business professionals, with the current consensus appearing to be that diversification destroys value. The effect of overall diversification (with no further refinement as to whether such diversification is related or unrelated to the business) on productivity has been investigated to a limited extent with conflicting results. In this paper, we investigate the effects of different forms of diversification on productivity. We find that related diversification, which prior research has identified with superior performance, enhances firm productivity while unrelated diversification reduces firm productivity. Our paper offers further empirical evidence towards resolving the conflicting findings of prior research while providing practitioners with additional points to ponder when engaging in firm diversification