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Technological diversity, related diversification, and firm performance
Author(s) -
Miller Douglas J.
Publication year - 2006
Publication title -
strategic management journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 11.035
H-Index - 286
eISSN - 1097-0266
pISSN - 0143-2095
DOI - 10.1002/smj.533
Subject(s) - diversification (marketing strategy) , endogeneity , economies of scope , portfolio , business , enterprise value , industrial organization , market value , economics , diversity (politics) , financial economics , marketing , econometrics , finance , sociology , economies of scale , anthropology
Previous findings that related diversification creates value have been called into question over concerns about methodology and measures. Reviewing existing theory to consider how a firm's knowledge base interacts with its product market activity, I address several of these concerns by creating a measure of technological diversity based on citation‐weighted patents. The measure indicates a firm's opportunity for corporate diversification based on economies of scope in valuable knowledge assets, is defined for both single‐ and multibusiness firms, and is not correlated with more fundamental aspects of diversification, such as the number of businesses in the corporate portfolio. Evidence from a large sample of firms shows the positive relationship between diversification based on technological diversity and market‐based measures of performance, controlling for R&D intensity and capital intensity as further indicators of the type of assets underlying diversification. Results hold when controlling for the endogeneity of diversification and performance in a cross‐sectional sample or when controlling for unobserved factors using panel data. Copyright © 2006 John Wiley & Sons, Ltd.