Curvilinearity in Diversification-Performance Relationship Revisited

Abstract

While extensive studies suggest an inverted U-shaped relationship between diversification and performance, most of these studies draw on firms in developed economies and it remains unclear whether this finding stays robust in emerging economies. This study investigates the performance implications of diversification pursued by business groups, a prevalent organizational form in emerging economies. Particularly, we examine the impacts of two important diversification decisions --- level of diversification and mode of diversification --- based on 89 Taiwanese business groups over a 20-year time period. In contrast with the conventional argument for an inverted U-shaped relationship in previous studies, we find a U-shaped relationship between the level of diversification and business group performance. Furthermore, we find that the mode of diversification matters. For both related and unrelated diversification, business groups will gain better performance when using the new division approach rather than the ...