Processes of Firm Growth and Diversification: Theory and Evidence

Abstract

In this short research note we investigate the role of diversification in the firm growth process. We build on Penrose’s (1959) Theory of the Growth of the Firm to formulate hypotheses about growth of employment, assets, and sales in the years before, during and after a new product introduction. We exploit a new database from the German machine tool industry which boasts a detailed and meaningful definition of diversification. Our exploratory analyses indicate that diversification, in terms of product introductions, is preceded by employment growth. Moreover, we find support that diversification is positively associated with subsequent asset growth, but negatively associated with subsequent employment growth.

Keywords: Diversification, Firm growth, Penrose, Machine tools, Growth process

JEL Classification: L6, L11, L20, L25