Sources of transfer problems in within-industry diversification

Abstract

This research examines how firms’ accumulation of experience in other markets within an industry causes transfer problems and limits the performance advantage of within-industry diversification. Using data on the Japanese nonlife insurance industry between 1907 and 1940, we demonstrate that a firm’s performance in a focal market decreases with more experience in other markets (i.e., nonfocal markets). This cumulative nonfocal market experience causes managers to transfer preexisting routines extensively and inappropriately to the focal market. We show that the negative effect deteriorates when the firms have already entered such nonfocal markets prior to their entry into the focal markets, and such nonfocal markets are populated by performance-comparable peers. We also find that the negative effect increases when firms transfer knowledge from nonfocal markets in which the focal market has low realized financial synergies, and when firms’ experience prior to entry into the focal market was successful. These findings explicate mechanisms by which negative performance effects of within-industry diversification occur, and advance our understanding of within-industry diversification by applying the idea of transfer problems from the literature on organizational learning.