Firm size and the pattern of diversification

Abstract

In this paper, the entry of firms into the foreign market is treated as a form of diversification that is an alternative to the more conventional form of product diversification. We develop a firm-level total index of diversification which comprises of product-line and geographical diversities. Using semi-parametric regression techniques, we analyze the relationship between various forms of diversification and firm size in five major manufacturing industries in Taiwan. Our findings indicate that diversification need not be solely a large firm phenomenon as observed in developed countries. Among small and medium firms, the most common form of diversification consists of diversifying into a different geographical market. The positive relation between firm size and product diversification typically found in developed countries is limited to large exporting firms in Taiwan.