Diversification Strategy and Corporate Performance in India: An Empirical Investigation

Abstract

Diversification is developing as one of the most important growth strategies these days followed by the corporate sector. Using multiple regression analysis, this paper studies the impact of diversification on the performance of firms in the Indian corporate sector over the ten year time period, that is, 1995–2004. Profitability is measured in terms of Return on Net Worth (RONW), Return on Capital Employed (ROCE) and Earnings Per Share (EPS), while growth is measured in term of Growth in Sales (GSALES) and Growth in Dividend (GDIV). But for diversification, nine other independent variables have been controlled for. The results show that diversification strategy, especially Related Business strategy, has a negative and significant impact on the performance of the firms. Risk and industry have a positive and significant association with most of the dependent variables, while age and leverage have a negative and significant association with most of the dependent variables. Firms in India need to achieve the Break-even Point with respect to their costs of diversification. After the gestation period is over, diversification strategy is likely to bear fruitful results for the firms in India.