Technological Diversification, Coherence and Performance of Firms

Abstract

Technological diversification at the level of the firm, i.e. the expansion of a firm's technology base into a wide range of technology fields, is found to be a prevailing phenomenon in all three major industrialized regions: US, Europe and Japan, prompting the term multi-technology corporation. Whereas previous studies have provided insights into the composition of technology portfolios of multi-technology firms, little is known about the link between technological diversification and firms' technological performance. Against a backdrop of the technology and innovation management literature, this article investigates the relationship between technological diversification and technological performance, taking into account the moderating role of technological coherence in firms' technology portfolios. Hereby, technological coherence is defined as the degree to which technologies in a technology portfolio are technologically related. In order to measure the technological coherence of portfolios, a measure of technological relatedness of technology fields is constructed based on patent citation patterns found in 450,000 EPO patent grants. Two hypotheses are presented in this article: (1) Technological diversification has an inverted U-shaped relationship with technological performance; and (2) Technological coherence moderates the relationship between technological diversification and technological performance positively. These hypotheses are tested empirically using a panel dataset (1995-2003) on patent portfolios pertaining to 184 US, European, and Japanese firms. The firms selected are the largest R&D actors in five industries: Pharmaceuticals & Biotechnology, Chemicals, Engineering & General Machinery, IT Hardware (computers and communication equipment), and Electronics & Electrical Machinery. Empirical results, obtained by fixed-effects negative binomial regressions, support both hypotheses in this article. Technological diversification has an inverted U-shaped relationship with technological performance. While technological diversification offers opportunities for cross-fertilization and technology fusion, high levels of diversification may yield few marginal benefits as firms risk lacking sufficient levels of scale to benefit from wide-ranging technological capabilities, and firms may encounter high levels of coordination and integration costs. Further, the results show that the net benefits of technological diversification are higher in technologically coherent technology portfolios. If firms build up a technologically coherent diversified portfolio, the presence of sufficient levels of scale is ensured and coordination costs are limited. This article clearly identifies the important role of technological coherence and points out in the discussion session the relevance of future research on interface management practices directed to the realization of the benefits of technological diversification.

Keywords: Firm performance, Innovation, Technology diversification, Technology relatedness