Diversification and industry evolution

Abstract

The two papers by Acs and Audretsch are, broadly taken, concerned with innovation. The first paper, 'Firm Profitability, Growth, and Innovation', is quite directly focused on innovation; the model looks for explanations of the innovative activity of firms. The second paper, 'Who Exits and Why?', explores innovation as well; technology and its evolution play the central role in the paper's explanation of exit. The papers develop important new information about the evolution of industry, and their findings suggest new research questions to those of us with strong interests in the topic. To introduce a different perspective on the findings and to suggest an agenda for future research that builds on the findings, I shall consider the two papers in the context of knowledge about diversified firms. The Business Week 'R & D Scoreboard' firms that are studied in the first paper are as a group quite diversified across four-digit Standard Industrial Classification industries, especially during the period sampled. The Acs and Audretsch Business Week sample has substantial overlap with the Federal Trade Commission's Line of Business sample of the same period that I used for my study of product-line diversification (Scott, 1993). Some of the firms diversified purposively to pursue economies of multimarket operation or market power, others diversified more or less randomly, and still others did not diversify their operations across product lines. After controlling for effects on innovation of R & D intensity and firm size, 'Firm Profitability, Growth, and Innovation' focuses on complex relationships among company profitability, company growth, and technological opportunity. Profitability stimulates innovation when technological opportunity is strong, but it does not do s'o when such opportunity is weak. In those industries with poor technological opportunity, however, company growth is correlated with more innovation subsequently, while growth does not affect innovations for the companies in the industries with great technological opportunities. These results are nicely consistent with Scherer's seminal analyses of the opportunities for innovation and R & D investment. Those analyses are gathered and revisited in Scherer (1984); dia* Editor's note: These two papers were the earlier versions of the two published here by Audretsch; Scott's comments apply to the published revision as welt as to the earlier manuscripts. Invited comments on 'Firm Profitability, Growth, and Innovation' and 'Who Exits and Why?' by Zoltan J.