Abstract
AbstractsResearch SummaryA surprisingly neglected facet of sector evolution is the evolutionary analysis of firms', and thus a sector's, scope. Defining a sector as a group of firms that can change their scope over time, we study the transformation of U.S. banking firms. We undertake a sectoral, population‐wide study of business‐scope transformation, with particular focus on which segments banks expand into. As financial intermediation evolved, a continuously shifting set of activities became associated with “core banking,” with scope changing and relatedness itself (measured through coincidence) evolving over the banking sector's history. Banks that expand scope while staying close to this evolving core attain net performance benefits. Identification tests show that the benefits of following the evolving core are robust to endogeneity.Managerial SummaryWhen does it pay to diversify into new segments? Our study looks at the transformation of U.S. banking firms from 1992 to 2006. Drawing on the full population of banks, we show that, as financial intermediation evolved, a continuously shifting set of activities became associated with “core banking.” Bank Holding Companies expanded their scope on aggregate, moving in and out of new segments. We find that while entry into new segments is negatively associated with performance improvement, diversification into this evolving core of activities is positively associated with performance improvement. This redefines “related diversification” and its positive value, showing relatedness changes over time, as a function of the evolution of the sector. We find that our results are robust to selection.
Highlights
What is an “industry”? The question is deceptively simple to ask, yet considerably more difficult to answer (Nightingale, 1978)
Our twofold contribution is to provide a sector-based measure of relatedness that evolves over time, reflecting sector-wide trends, and to use it to assess the value of combinations—as opposed to merely registering their occurrence
Column 1 of Table 3 reports the results based on specification (1). This is a benchmark specification where we look for the impact on performance of unconditional scope expansion, as captured by Cum Adoption
Summary
What is an “industry”? The question is deceptively simple to ask, yet considerably more difficult to answer (Nightingale, 1978). While most scholars consider industries as populations of similar firms, they still allow for those firms' scope to evolve over time (Baum & Singh, 1994; Nelson & Winter, 1982). This brings us to a second, related question: How does an industry change? It is hard to understand the evolution of the chemicals industry without looking at the changes in firms such as Dupont and it is hard to understand Dupont itself without looking at how it broadened its scope. The definition and scope of the industry itself evolve as its member firms enter new segments and leave old ones
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