The Existence and Nature of Multi-Business Firms: Double Specialization and Neighboring Businesses

46 Pages Posted: 7 Aug 2018

See all articles by Birger Wernerfelt

Birger Wernerfelt

Massachusetts Institute of Technology (MIT) - Sloan School of Management

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Date Written: July 18, 2018

Abstract

We propose a theory of the scope of the firm and offer supporting evidence. The theory suggests that multi-business firms exist because they allow better deployment of factors that, because of sub-additive bargaining costs, cannot be traded in fractions or rented for short periods. It predicts that the businesses making up multi-business firms are “neighbors” in two senses: their service needs are correlated and factors specialized to one business are also productive in the other. We then look at a sample of acquisitions and document three regularities. First, input intensities of targets change to more closely resemble those of their acquirers. Second, the performance of targets improves, but does not catch up to that of their acquirers. Third, acquirers tend to select targets in industries that are similar to their own.

Suggested Citation

Wernerfelt, Birger, The Existence and Nature of Multi-Business Firms: Double Specialization and Neighboring Businesses (July 18, 2018). Available at SSRN: https://ssrn.com/abstract=3216186 or http://dx.doi.org/10.2139/ssrn.3216186

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