The Herfindahl-Hirschmann Index (HHI) Revisited

Abstract

The Herfindahl-Hirschman Index (HHI) is one of the more commonly used measures in the Management and Economics literatures. While its principal uses are measuring market concentration or firm diversification, it has been extended beyond that. The measure has two properties that potentially affect empirical inference: 1) it is a compound measure--intentionally combining fewness and skewness; 2) any given HHI represents an infinite set of distributions. We assess whether these properties affect inferences in strategy research. To do so, we replicate a prior study which employs HHI to test the impact of geographic diversification on firm value. We find that results with HHI are not robust across samples and specifications. We further find that decomposing HHI into its fewness and skewness components resolves the robustness problem. In particular, firm value increases in the number of units, but decreases with dissimilarity across units. These results reinforce Penrosian theories of growth through related diversification.

Keywords: Herfindahl index, diversification, geographic diversification