Abstract
The conventional approach to measuring interindustry relatedness uses the Standard Industrial Classification (SIC) system to capture the “distance” between industries. Although relatedness measures based on SIC codes (or equivalent classifications) are readily available and easy to compute, they do not screen effectively for the conditions under which related diversification creates value. This article constructs an alternative, survivor-based measure of interindustry relatedness and compares it to similar measures based on distances between SIC codes. The authors find that survivor-based measures consistently outperform SIC-based measures in predicting firms' decisions to enter new markets, even when herding tendencies and motives related to mutual forbearance are taken into account.
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