Diversification Strategy and Firm Performance: Evidence from Indian Manufacturing Firms

Abstract

While many scholars have examined the business group affiliation–performance relationship, very few have examined the role that industry and diversification (related versus unrelated) strategy plays in this focal relationship (Carney et al., 2011). I provide empirical evidence that the effect of diversified business groups on the performance of affiliated firms is dependent on ( a) the industry to which the firm belongs and ( b) the type of diversification strategy followed by the group. I have found that in the chemical and allied products industry, the return on total assets (ROA) of firms has a negative relationship with unrelated diversification, while it has a positive relationship in the transportation equipment industry. However, with related diversification, ROA of firms in the chemical and allied products industry has a positive relationship, while it has a negative relationship with firms in the transportation equipment industry.