Path Dependence in the Evolution of the Business Portfolio Configuration of Large Multi-business Firms

Abstract

Based on learning theory, this study introduces a distinction into three orders (zero, first, second) of path dependence. Applying econometric time series analysis (VAR models), we explore the order of path dependence in firm investment, divestment, and cooperation decisions. An extension to prior research, we not only investigate the order of path dependence for each type of portfolio decision but also investigate the order of path dependence in firms’ collective portfolio decision making. Results show differences in the order of path dependence for the three types of portfolio decisions between firms. Moreover, the collective portfolio activities display a different order of path dependence from the analysis of each portfolio activity separately, which indicates substantial interactions among them. In sum, our empirical analyses indicate the need to distinguish between different orders of path dependence and to demonstrate that an organizational activity is not only dependent on its general conditions, as contingency theory argues, nor is it solely dependent on its own history, as classical path dependence theory argues. Instead, an organizational activity is also dependent on the history of related activities.