Diversification Strategies and Firm Performance: A Sample Selection Approach

Quaderni - Working Paper DSE N° 896

33 Pages Posted: 30 Jul 2013

See all articles by Enrico Santarelli

Enrico Santarelli

University of Bologna - Department of Economics

Hien Thu Tran

RMIT International University; University of Bologna

Date Written: July 30, 2013

Abstract

This paper is based upon the assumption that firm profitability is determined by its degree of diversification which in turn is strongly related to the antecedent decision to carry out diversification activities. This calls for an empirical approach that permits the joint analysis of the three interrelated and consecutive stages of the overall diversification process: diversification decision, degree of diversification, and outcome of diversification. We apply parametric and semiparametric approaches to control for sample selection and endogeneity of diversification decision in both static and dynamic models. After controlling for industry fixed-effects, empirical evidence from firm-level data shows that diversification has a curvilinear effect on profitability: it improves firms’ profit up to a point, after which a further increase in diversification is associated with declining performance. This implies that firms should consider optimal levels of product diversification when they expand product offerings beyond their core business. Other worth-noting findings include: (i) factors stimulating firms to diversify do not necessarily encourage them to extend their diversification strategy; (ii) firms which are endowed with highly skilled human capital are likely to successfully exploit diversification as an engine of growth; (iii) while industry performance does not influence profitability of firms, it impacts their diversification decision and degree.

Keywords: diversification, firm performance, panel data, sample selection, parametric and semiparametric models

JEL Classification: L21, L25, C14, C23

Suggested Citation

Santarelli, Enrico and Tran, Hien Thu and Tran, Hien Thu, Diversification Strategies and Firm Performance: A Sample Selection Approach (July 30, 2013). Quaderni - Working Paper DSE N° 896, Available at SSRN: https://ssrn.com/abstract=2303642 or http://dx.doi.org/10.2139/ssrn.2303642

Enrico Santarelli (Contact Author)

University of Bologna - Department of Economics ( email )

Piazza Scaravilli, 2
I-40126 Bologna
Italy
+39 051 2098487 (Phone)

HOME PAGE: http://www2.dse.unibo.it/santarel

Hien Thu Tran

RMIT International University ( email )

521 Kim Ma, Ba Dinh, Hanoi
Hanoi, Hanoi 10000
Vietnam

University of Bologna ( email )

Strada Maggiore 45
Bologna, 40125
Italy

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