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Though we have had extensive theoretical and empirical studies on diversification during the past decades, yet the impact of diversification on a firm’s financial performance remains unclear. Earlier, authors (like Arnould, 1969; Berry, 1971; Gort, 1962) tried to answer the fundamental question of ‘whether a firm should diversify or not’, but were unable to reach any consensus. Rumelt (1974) categorized diversification into related and unrelated and concluded that diversification in a related area is better than being undiversified. Even after the seminal work of Rumelt, empirical evidence on the impact of both types of diversification on a firm’s financial performance is still mixed (Berger & Ofek, 1995; Chen & Joseph Yu, 2012; Duin & Hansen, 1991; Palepu, 1985; Palich, Cardinal, & Miller, 2000). In this study, we make an attempt to answer the same fundamental question of ‘whether a firm should diversify or not’ by including three new aspects: first, we measure the impact of diversification (and its types) on the three aspects of a firm’s financial performance, that is, risk, return and risk-adjusted return; second, we measure this impact on lag 1 of diversification; and third, we use a newly developed approach, that is, correlation-based diversification measures (Nigam & Gupta, 2018b) to measure different types of diversification. Initially, our results indicated insignificant impact of diversification (and its types) on all firm performance measures. Later, we segregated related diversification (RD) into positive related diversification (PRD) and negative related diversification (NRD); then we measured the impact of each type of diversification separately and found that diversification is better than being undiversified only if it is into a negative related area. It is a new finding and may have some policy implications for the management while designing its diversification strategy.

There is increasing interest in the drivers of industrial diversification, and how these depend on economic and industry structures. This article contributes to this line of inquiry by analyzing the role of industry relatedness in explaining variations in industry diversification, measured as the entry of new industry specializations, across 173 European regions during the period 2004-2012. First, we show that there are significant differences across regions in Europe in terms of industrial diversification. Second, we provide robust evidence showing that the probability that a new industry specialization develops in a region is positively associated with the new industry's relatedness to the region's current industries. Third, a novel finding is that the influence of relatedness on the probability of new industrial specializations depends on innovation capacity of a region. We find that relatedness is a more important driver of diversification in regions with a weaker innovation capacity. The effect of relatedness appears to decrease monotonically as the innovation capacity of a regional economy increases. This is consistent with the argument that high innovation capacity allows an economy to break from its past and to develop, for the economy, truly new industry specializations. We infer from this that innovation capacity is a critical factor for economic resilience and diversification capacity.

Sharing common inputs across business lines can potentially generate synergy that justifies related diversification. The pursuit of such synergy through diversification is, however, fundamentally driven by the indivisibility of inputs between firms. Following Penrose's insight, I argue that to realize this synergy, a firm needs to actively manage the interdependencies between different business lines, which, in turn, increases its coordination costs. The coordination costs may increase faster than synergy and set a limit to related diversification. This is particularly salient when the firm's existing business lines already have complex interdependencies among them. I test these arguments on a dataset of U.S. equipment manufacturers for the period 1993 to 2003. The results show that a firm is more likely to diversify into a new business when its existing business lines can potentially share more inputs with the new business; however, the firm is less likely to diversify into any new business when its existing business lines are complex. Importantly, the firm's likelihood of diversifying into a new business decreases more with the complexity in the firm's existing business lines if they share more inputs with the new business. These results suggest that increasing coordination costs counterbalance the potential synergistic benefits associated with related diversification.

Prior research has reported mixed findings regarding the relationship between diversification and firm performance, because a diversification strategy produces not only synergies but also anti-synergies. We argue that information technology (IT) can help unlock the potential of diversification to enhance firm performance by maximising its synergistic effect while minimising its anti-synergistic effect. Using a sample of publicly listed Chinese firms on the Shanghai or Shenzhen Stock Exchange, we find that IT investment positively moderates the relationship between diversification and firm performance. Investing in IT contributes to greater coordination, control, information exchange, and cross-business knowledge sharing, which can enhance the synergistic effect of diversification and mitigate its anti-synergistic effect. Furthermore, we find that the moderating effect of IT investment on the relationship between diversification and firm performance is stronger for related diversification than unrelated diversification, indicating a greater need for IT when undertaking related (vs unrelated) diversification. These findings contribute to a more comprehensive understanding of the relationship between diversification and firm performance. Moreover, we advance research by showing that the moderating effect of IT on the relationship between diversification and firm performance varies according to diversification strategy.

This study moves beyond the conventional linear assumption of the growth-diversification relationship, examining how revenue growth acts as a nonlinear driver of a firm's choice between related and unrelated diversification. Using a panel dataset of 470 non-financial firms in Vietnam from 2013 to 2023, we employ a Panel Threshold Regression model to identify distinct strategic regimes. Our results reveal two critical growth thresholds that trigger strategic pivots. Related diversification, an exploitative strategy aligned with the Resource-Based View, is pursued only after firms surpass a high-growth threshold of 14.2%. Conversely, unrelated diversification, an exploratory strategy consistent with Portfolio and Agency Theories, characterizes firms in a low-growth regime below 7.6%. We also identify a 'strategic transition zone' for firms with growth between 7.6% and 14.2%. Within this corridor, firms adopt a distinct posture: they cease pursuing unrelated diversification as growth exceeds 7.6%, yet appear to lack the sufficient resources needed for related diversification, a strategy that becomes viable only above the 14.2% threshold. This period is a phase of active strategic recalibration, where firms re-evaluate market signals before committing to a definitive exploitation or exploration path. By providing this dynamic, threshold-based framework, our research offers a more realistic model of corporate strategy, demonstrating that a firm's position on its growth journey, not merely growth itself, determines its diversification path.

Purpose This paper aims to explore how corporate diversification influences corporate cash holdings (CCH) in India. It also assesses CCH behavior and its determinants during crisis, stability and recovery periods. Design/methodology/approach The study uses the system generalized method of moments (System GMM) on 1684 non-financial firms listed on the National Stock Exchange during 2002–2022. Further analyses are carried out for group-affiliated firms based on investment cash flow sensitivity, agency costs and debt capacity. Findings The findings show that firm diversification (at the group level) results in a roughly 6% fall in cash ratio, thereby implying that diversified firms (diversified business groups) hold lower cash levels than specialized firms. The reduced cash balances are attributed to the financially unconstrained nature of diversified business groups, higher debt capacity, good governance behavior and active internal markets. Additionally, the authors observe a time-varying cash policy for diversified firms, with mean cash holdings being 2% higher during crisis periods. Moreover, the findings reveal that the inverse relationship between diversified firms and CCH is less pronounced for unrelated diversified firms (2% fall in cash ratio) than related diversified firms (5% fall in cash ratio). Originality/value To the best of the authors’ knowledge, this is the first study to examine the relationship between corporate diversification and CCH in India during both crisis and non-crisis periods. The authors’ research uniquely uses System GMM on a large sample and differentiates between related and unrelated diversification.

PurposeMany large construction firms (LCFs) adopt product diversification (PD) to counter downturns and spread risks. However, no detailed information is available concerning the type of PD that improves their performance. In addition, it is still uncertain how much changes in institutional dimensions influence the effectiveness of PD. Therefore, the aim is to resolve this issue by establishing a model that shows the extent of this influence.Design/methodology/approachThe generalised method of moments (GMM) estimator is used to model the PD strategies of 86 LCFs in Malaysia over 14 years (2003–2016) and its impact on productivity and profitability performance.FindingsUnrelated diversification (UD) decreased firm performance in 2003–2016, while related diversification (RD) had a positive impact during the more liberal 2010–2016 phase. The models show that the impact of PD is highly dependent on changes in institutional dimensions.Practical implicationsFirstly, managers may adjust the type of PD and its level of diversification to improve firm performance. Secondly, they may devise PD strategies based on changes in institutional dimensions to maximise their effectiveness.Originality/valueThe study contributes to the literature by determining the optimal amount of PD (including RD and UD) and its impact on performance. Secondly, the study is the first to investigate the moderating relationship of the institutional dimensions of economic and regulatory institutions on PD-firm performance. Thirdly, the study is the first to explore the components of technical-scale-scope economies (movement towards and around the production frontier), this being crucial to the strategy that was only conjectured in previous studies.

This study aims to examine how unrelated diversification facilitate firm’s growth and innovation. To achieve this goal, we investigate how Maeil Dairies has diversified through open innovation as the Korean dairy market struggles to maintain its size. Maeil Dairies, one of the top three conglomerates in the Korean dairy industry, has gone through different forms of diversification both related and unrelated to its core competencies. This study presents what the overlapping competencies are in its diversified products and businesses, analyzes the effectiveness of diversification in terms of relatedness, and examines the need for unrelated diversification. By analyzing the four diversification categories of the Maeil Dairies case and applying diversification theory, this study shows that although related diversification is more recommendable in most circumstances, unrelated diversification may present new opportunities and is necessary in order to avoid stagnation and falling behind.

PurposeThis research aims to empirically investigate the impacts of product and international diversification strategies on firm-level inventory performance.Design/methodology/approachThis study empirically examines the associations between product and international diversification strategies and inventory performance based on a sample of 64,124 observations across 7,367 US publicly traded firms between 1989 and 2019 from the COMPUSTAT Segment, Fundamental Annual and Fundamental Quarterly data files. We employ both linear and nonlinear regression models to perform our empirical analysis.FindingsThis research provides strong evidence that there exists a U-shaped relationship between unrelated product diversification and inventory level and a partially inverted U-shaped relationship between international diversification and inventory level. We also find a positive impact of related product diversification on inventory level, but there is no significant curvilinear relationship between related product diversification and inventory level.Practical implicationsOur research findings offer important insights into top management’s strategic planning for diversification strategies and operations manager’s inventory control policies to achieve the strategic fit between corporate diversification and inventory management.Originality/valueProduct and international diversification strategies not only play an essential role in the firm’s competitive advantage, but also have a significant influence on operations manager’s inventory decision. This research is among the first to systematically investigate how top management’s related product, unrelated product and international diversification strategies may have complex nonlinear impacts on inventory performance.

This study aims to examine how unrelated diversification facilitate firm's growth and innovation. To achieve this goal, we investigate how Maeil Dairies has diversified through open innovation as the Korean dairy market struggles to maintain its size. Maeil Dairies, one of the top three conglomerates in the Korean dairy industry, has gone through different forms of diversification both related and unrelated to its core competencies. This study presents what the overlapping competencies are in its diversified products and businesses, analyzes the effectiveness of diversification in terms of relatedness, and examines the need for unrelated diversification. By analyzing the four diversification categories of the Maeil Dairies case and applying diversification theory, this study shows that although related diversification is more recommendable in most circumstances, unrelated diversification may present new opportunities and is necessary in order to avoid stagnation and falling behind.