Regional Diversification and Financial Performance through an Excess-Capacity Theory lens: A New Explanation for Mixed Results

Abstract

This paper examines the association between regional diversification and a firm’s financial performance through a theoretical lens known as “excess capacity”, which is based on a historically embedded understanding of organizational capacity phenomena.

An accumulated body of literature over the past century have used various theories (such as agency theory, transaction cost theory, market power theory, portfolio theory, regional diversification theory and much more) to explain the diversification phenomena in organisations and its impact on firms’ performances from different perspectives but the results have been mixed and to some extent contradictory and at best inconclusive.

This study complements and extends the literature on regional diversification and organisational performance and provide some explanation for contradictory results regarding positive, negative and no association between diversity and organisational performance.

This paper looks at the regional diversification from a new perspective (management accounting perspective) and examines the association between diversification and firms’ performance from the lenses of a new theory (the theory of excess capacity) which has rarely been used in diversification literature before.

The results are fascinating and explaining the conditions when the diversification can have a positive, negative or no impact on firms’ performances. So, according to the theory of excess capacity, it is not only reasonable but also expected to have a positive, negative or no association between diversity and organisational performance and all depends on the capacity of the firms as well as the contribution margins of diversified and core products/services.

Keywords: Regional diversification, firm' performance, excess capacity