The Herfindahl-Hirschmann Index (HHI) Revisited
33 Pages Posted: 8 Mar 2021 Last revised: 20 Dec 2021
Date Written: November 25, 2021
The Herfindahl-Hirschman Index (HHI) is one of the more commonly used measures in the Strategy and Economics literatures. While its principal uses are measuring market concentration or firm diversification, it has been extended beyond that. One concern with the measure is that an infinite set of distributions can have the same HHI. We assess whether that affects 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 count and shape (dissimilarity) components resolves the robustness problem. In particular, firm value increases in the number of units, but decreases in all measures of diversification when controlling for the number of units.
Keywords: Herfindahl index, diversification, geographic diversification
Suggested Citation: Suggested Citation