Relatedness as driver of regional diversification: a research agenda. Regional Studies. The regional diversification literature claims that regions diversify in new activities related to their ...existing activities from which new activities draw on and combine local capabilities. The paper offers a critical assessment and identifies a number of crucial issues for future research. It calls for (1) a disentanglement of the various types of capabilities that make regions diversify; (2) the inclusion of more geographical wisdom in the study of regional diversification, like a focus on the effects of territory-specific contexts, such as institutions; (3) a thorough investigation in the conditioning factors of related and unrelated diversification in regions; and (4) a micro-perspective on regional diversification that assesses the role of economic and institutional agents in a multi-scalar perspective.
Towards a theory of regional diversification: combining insights from Evolutionary Economic Geography and Transition Studies. Regional Studies. This paper develops a theoretical framework of regional ...diversification by combining insights from Evolutionary Economic Geography and Transition Studies. It argues that a theory of regional diversification should not only build on the current understanding of related diversification but also account for processes of unrelated diversification by looking at the role of agency in processes of institutional entrepreneurship, and at enabling and constraining factors at various spatial scales. This paper proposes a typology of four regional diversification trajectories by cross-tabulating related versus unrelated diversification with niche creation versus regime adoption, and it develops a number of propositions.
Our objective is to establish whether the level of assets, liabilities, and income diversification of the Mexican banks is related to their profitability and risk levels. Using the financial ...information of the 15 key banks, between 2010 and 2021, along with the Herfindahl-Hirschman Index and a series of polynomial regression analyzes, we calculated the diversification level of each bank. We also computed a series of inflection points suggesting that Mexican banks need to adopt an asset specialization long-term strategy, but to a point because a radical transformation would be detrimental to both return and risk. Similarly, we do not recommend venturing into a radical income diversification strategy, for the same reason. On the other hand, the liability diversification strategy is difficult to apply for achieving the mentioned objectives. Furthermore, we would like to emphasize that our analysis takes into consideration the high presence of foreign banking affiliates in Mexico.
There is increasing interest in the drivers of industrial diversification, and how these depend on economic and industry structures. This article contributes to this line of inquiry by analyzing the ...role of industry relatedness in explaining variations in industry diversification, measured as the entry of new industry specializations, across 173 European regions during the period 2004-2012. First, we show that there are significant differences across regions in Europe in terms of industrial diversification. Second, we provide robust evidence showing that the probability that a new industry specialization develops in a region is positively associated with the new industry's relatedness to the region's current industries. Third, a novel finding is that the influence of relatedness on the probability of new industrial specializations depends on innovation capacity of a region. We find that relatedness is a more important driver of diversification in regions with a weaker innovation capacity. The effect of relatedness appears to decrease monotonically as the innovation capacity of a regional economy increases. This is consistent with the argument that high innovation capacity allows an economy to break from its past and to develop, for the economy, truly new industry specializations. We infer from this that innovation capacity is a critical factor for economic resilience and diversification capacity.
The resource-based view on firm diversification, subsequent to Penrose (1959), has focused primarily on the fungibility of resources across domains. We make a clear analytical distinction between ...scale free capabilities and those that are subject to opportunity costs and must be allocated to one use or another, thereby shifting the discourse back to Penrose's (1959) original argument regarding the stock of organizational capabilities. The existence of resources and capabilities that must be allocated across alternative uses implies that profit-maximizing diversification decisions should be based upon the opportunity cost of their use in one domain or another. This opportunity cost logic provides a rational explanation for the divergence between total profits and profit margins. Firms make profit-maximizing decisions to increase total profit via diversification when the industries in which they are currently competing become relatively mature. Due to the spreading of these capabilities across more segments, we may observe that firms' profit-maximizing diversification actions lead to total profit growth but lower average returns. The model provides an alternative explanation for empirical observations regarding the diversification discount. The self-selection effect noted in recent work in corporate finance may not be indicative of inferior capabilities of diversifying firms but of the limited opportunity contexts in which these firms are operating.
Though we have had extensive theoretical and empirical studies on diversification during the past decades, yet the impact of diversification on a firm’s financial performance remains unclear. ...Earlier, authors (like Arnould, 1969; Berry, 1971; Gort, 1962) tried to answer the fundamental question of ‘whether a firm should diversify or not’, but were unable to reach any consensus. Rumelt (1974) categorized diversification into related and unrelated and concluded that diversification in a related area is better than being undiversified. Even after the seminal work of Rumelt, empirical evidence on the impact of both types of diversification on a firm’s financial performance is still mixed (Berger & Ofek, 1995; Chen & Joseph Yu, 2012; Duin & Hansen, 1991; Palepu, 1985; Palich, Cardinal, & Miller, 2000). In this study, we make an attempt to answer the same fundamental question of ‘whether a firm should diversify or not’ by including three new aspects: first, we measure the impact of diversification (and its types) on the three aspects of a firm’s financial performance, that is, risk, return and risk-adjusted return; second, we measure this impact on lag
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of diversification; and third, we use a newly developed approach, that is, correlation-based diversification measures (Nigam & Gupta, 2018b) to measure different types of diversification. Initially, our results indicated insignificant impact of diversification (and its types) on all firm performance measures. Later, we segregated related diversification (RD) into positive related diversification (PRD) and negative related diversification (NRD); then we measured the impact of each type of diversification separately and found that diversification is better than being undiversified only if it is into a negative related area. It is a new finding and may have some policy implications for the management while designing its diversification strategy.
The staged internationalization model posits that firms internationalize incrementally over time. However, born-globals are less likely to follow a more gradual model of staged internationalization, ...and they must decide on the scope of internationalization at their founding to exploit entrepreneurial opportunities on a global scale. Because returns from international expansion must be considered along with the risk of failure, we propose that born-globals’ local industry conditions moderate the relationship between the scope of intraregional diversification (geographic diversification within a region) or interregional diversification (geographic diversification across different regions) and survival. Using a sample of 680 Swedish born-globals founded in 2002, 2003, or 2004 and followed until 2010; data from Swedish Customs; and archival performance data, we find that interregional geographic diversification increases—and that intraregional diversification decreases—the likelihood of failure, which declines further when born-globals undertake intraregional geographic diversification under higher environmental dynamism in the home country industry. Conversely, undertaking interregional geographic diversification even when the home country industry is munificent increases the likelihood of failure (marginally significant). The findings are robust to several alternative specifications.
This paper contributes to the literature on cryptocurrencies by examining the performance of naïve (1/N) and optimal (Markowitz) diversification in a portfolio of four popular cryptocurrencies. We ...employ weekly data with weekly rebalancing and show there is very little to select between naïve diversification and optimal diversification. Our results hold for different levels of risk-aversion and an alternative estimation window.
•We examine the diversification benefits of cryptocurrencies.•We employ weekly data for four popular cryptocurrencies.•We show little difference between naïve and optimal diversification.•Our results hold for different levels of risk-aversions and estimation windows.
Based on a novel sample of Spanish listed companies from nonfinancial sectors, we explore the effect of product and geographic diversification on company performance during an economic downturn. The ...study develops comprehensive models to understand the interaction effect of both strategies on company performance. We find a U-shaped geographic diversification–performance relationship and no evidence of a positive effect from product diversification, unless combined with high levels of geographic diversification. The results show that companies improved their performance by combining these strategies. The results are robust after controlling for the endogeneity of both types of diversification. Our findings highlight that geographic diversification is an effective and valuable strategy in economic downturns. Furthermore, this study confirms the importance of the interaction between product and geographic diversification to determine the total effect of product or geographic diversification on company performance.
Does diversification affect firm response to stakeholder demands and social issues? Despite extensive interest in corporate diversification in the strategy literature, the relationship between ...diversification and corporate social performance (CSP) remains largely unexplored. In this study, I propose that the level of diversification will be positively related to the CSP of firms. However, when diversified firms have a strong focus on short-term profit, it may discourage firm response to stakeholder demands and investment in social issues, thereby negatively moderating the positive relationship between the level of diversification and CSP. Empirical testing on a sample of U.S. firms generally supports my predictions.
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