Build or Buy? Human Capital and Corporate Diversification

Abstract

Firms either enter new sectors by building on their resources or buying existing companies. Using French administrative data, we propose a measure of human capital distance between a firm and a sector of entry. Using a shift-share instrument, we show that firms build in close sectors and buy in distant sectors in terms of human capital distance. Firms build by hiring new workers, which becomes increasingly costly in distant sectors as it requires not only hiring more workers but also having more organizational capital to integrate these workers. Hence, firms buy in distant sectors to acquire already operational human capital.

Keywords: Diversification, M\&As, (In)organic growth, Human capital, Organizational Capital

JEL Classification: L25, J24, J30, G34