Unrelated Diversification Research Articles

Cash or crash? The diversification game and corporate cash holdings in India

Purpose This paper aims to explore how corporate diversification influences corporate cash holdings (CCH) in India. It also assesses CCH behavior and its determinants during crisis, stability and recovery periods. Design/methodology/approach The study uses the system generalized method of moments (System GMM) on 1684 non-financial firms listed on the National Stock Exchange during 2002–2022. Further analyses are carried out for group-affiliated firms based on investment cash flow sensitivity, agency costs and debt capacity. Findings The findings show that firm diversification (at the group level) results in a roughly 6% fall in cash ratio, thereby implying that diversified firms (diversified business groups) hold lower cash levels than specialized firms. The reduced cash balances are attributed to the financially unconstrained nature of diversified business groups, higher debt capacity, good governance behavior and active internal markets. Additionally, the authors observe a time-varying cash policy for diversified firms, with mean cash holdings being 2% higher during crisis periods. Moreover, the findings reveal that the inverse relationship between diversified firms and CCH is less pronounced for unrelated diversified firms (2% fall in cash ratio) than related diversified firms (5% fall in cash ratio). Originality/value To the best of the authors’ knowledge, this is the first study to examine the relationship between corporate diversification and CCH in India during both crisis and non-crisis periods. The authors’ research uniquely uses System GMM on a large sample and differentiates between related and unrelated diversification.

Windows of opportunity for unrelated diversification: a patent data analysis of the field of neurotechnology

PurposeThis study investigates the potential of low-income countries to mitigate technological lock-ins by exploiting windows of opportunity (WOOs). Given their inherent inclination toward path dependency, these countries often face challenges in diversifying beyond their established technological trajectories. We examine the pivotal role of adopting shorter cycle times of technologies (CTTs) in opening technological WOO, triggering unrelated diversification and accelerating technological catch-up.Design/methodology/approachUsing fixed-effect regression models, we analyze country-level patent data within the neurotechnology domain from 1995 to 2021 – a period marked by significant technological change since 2010. Our focus lies in comparing diversification and catch-up trends between low-income and high-income countries, while evaluating the performance of CTT.FindingsOur findings reveal that as low-income countries increase their knowledge complexity (KC), they tend to be locked into existing technological paths. To mitigate lock-in risks, they can strategically adopt technologies with shorter CTTs. These technologies act as catalysts, opening up technological WOOs and stimulating unrelated diversification. KC presents a double-edged sword in the catch-up process, but unrelated diversification can eliminate this dilemma.Practical implicationsOur study introduces the KC-CTT framework, proposing practical strategies to enhance and sustain countries’ competitive advantages.Originality/valueDiversification and catch-up emerge from two separate bodies of literature but present a conceptual overlap. This research bridges the gap between the two literatures by investigating the impact of CTT as their predictor variable.

Разноуровневые стратегии развития: арктический нефтегазовый вектор

The balanced development of the hydrocarbon potential in the Arctic is currently a strategic priority for Russia. Given the present conditions of the global energy sector, alongside new geopolitical challenges and trends towards low-carbon and ecologically balanced development, there is a need for a system of coordinated strategies across the industry, regional, and corporate levels. To effectively develop Arctic oil and gas resources, it is necessary to ensure technological sovereignty, which involves equipping oil and gas companies with domestically produced equipment and software. Strategies should also focus on the development of industries that produce high value-added products, particularly in the petrochemical sector. Public administrators and corporate managers responsible for key decisions must have a clear, long-term vision for the development of the Arctic oil and gas sector and employ established methodological approaches in strategy design. The goal of this study is to substantiate the specific characteristics of multilevel strategies and assess the feasibility of using a matrix approach when designing strategic alternatives relevant to the current economic environment. The research methodology is based on the approaches, methods, and tools of strategic management and planning, with a particular focus on methods for designing strategic alternatives. The novelty of the research lies in the development of a system of criteria for comparing strategies and their target priorities at the industry, regional, and corporate levels. The study identifies current trends and challenges arising from the energy transition, stringent sanctions policies, and growing technological capabilities. It proposes an approach to designing alternative strategies of related and unrelated diversification for oil and gas companies. Developing a holistic concept of coordinated industry and corporate strategies is identified as a promising area for further research.

Employment imbalances in EU regions: technological dependence or high-tech trade centrality?

ABSTRACT We analyse the role of technological dependence and interregional trade centrality in explaining a region’s employment performance. We first identify the core–periphery technological structure of European Union (EU) regions, clustering them based on their high-tech trade relations (trade blocks) and technological and economic indicators (place-based regional groups). We show that EU regions have a fractal structure: blocks at the core and periphery of the high-tech trade network are divided into core and peripheral subgroups, which differ significantly in terms of innovation and employment performance. Next, the econometric analysis shows that buyer centrality is the main component of employment growth (especially in services), but within trade blocks it has to be combined with low technological dependence on more innovative regions (especially in manufacturing). Cohesion policies should pay attention to the fractal structure of regional inequalities, and Smart Specialisation strategies should consider that unrelated diversification towards activities intensive in the use of high-tech inputs may be more conducive to employment growth.

Levels of Unrelated Diversification and Firm Performance: A Conceptual Description of an S-Shaped Hypothesis

This study reconceptualizes the so far inconclusive relationship between unrelated diversification and financial performance by explaining how coordination costs can shape the amount of free cash flow and related agency problems at different levels of unrelated diversification. The study builds upon the notion that coordination requirements and associated coordination costs will vary at levels of unrelated diversification to regulate the amount of free cash flow managers will have at their disposal at each level of unrelated diversification. Based on the agency costs associated with free cash flow, we conceptualize that at different stages of unrelated diversification, the degree of managerial misuse of free cash flow can create different performance implications of the unrelated diversified firm to explain a proposed S-shaped relationship.

Varieties of middle-income trap: Heterogeneous trajectories and common determinants

This work provides new evidence on the structural change processes undertaken by countries trapped in the middle-income trap (MIT) by applying a comprehensive approach, from both the supply and the demand sides. First, it provides evidence that there is a regular trapping mechanism, determined by the interaction between external demand constraints and the level of complexity of the economies. External constraint operates since MIT countries depend on exogenous prices to grow. Meanwhile, that constraint relaxes as the complexity of production increases. Second, it presents a novel identification of the MIT countries trajectories using indicators of economic complexity. A typology of the varieties of MIT is built according to the level of complexity of national economies and the relatedness between their current productive structure and more complex goods. It shows that having reached certain levels, further increases in supply complexity require a deepening of structural change through unrelated diversification.

Exploring the Impact of Unrelated Diversification on Corporate performance in Egypt

Exploring the Impact of Unrelated Diversification on Corporate performance in Egypt

Economic policy uncertainty and capital structure in Europe: an agency approach

Motivated by the unprecedented levels of economic policy uncertainty (EPU) recently experienced in Europe, we study how EPU affects capital structure and whether cultural, institutional, and financial conditions and corporate diversification moderate this relationship in a sample of 3175 firms from eleven European countries. Firstly, our results indicate that financial leverage is positively related to EPU, with this relationship being moderated by uncertainty avoidance, institutional quality, and financial development. Secondly, corporate debt is positively related to corporate diversification. This relationship is stronger for unrelated than for related diversification. In addition to the direct effect, both types of diversification indirectly moderate the positive influence of EPU on leverage, with this effect being stronger for unrelated diversification. Our results show that debt and uncertainty avoidance, institutional quality, and financial development work as substitute mechanisms to alleviate the agency costs caused by EPU and that corporate diversification reduces the informational gap between firm insiders and outside investors exacerbated by EPU.

Related or unrelated diversification: What is smart specialization?

In this paper, we investigate the nature of path dependency in specialization of countries in terms of international trade. Our focus is on the product space density metric, which is employed in the literature on smart specialization and the product space. We find that although density is supposed to capture relatedness between a country's current specialization pattern and potential products that it may diversify into, density also contains a large component of what we call unrelated diversity, i.e., country- and product fixed effects. Together, these fixed effects capture 97 % of the variance of density. We isolate the related variety component in density and then estimate logit regressions that predict gains or losses of specialization. The relative influence of unrelated variety on changes of specialization increases with the level of diversification of the country: only countries that are not already diversified are strongly influences of related variety. We also show that the impact of the country effect in the impact of unrelated diversity in gains or keeps of specializations increases with diversity. This suggests that existing capabilities breed new capabilities, i.e., diversification is a virtuous circle that is largely independent of relatedness, and that the source of path dependency in international specialization patterns lies much more in generic production capabilities rather than relatedness in product space.

Foreign-owned enterprises, government subsidies, and unrelated diversification of manufacturing in Chinese cities

ABSTRACT Previous research proposes that extra-regional linkages and non-firm actors might generate unrelated diversification. This article contributes to the field by testing the role of government subsidies in moderating the relationship between foreign-owned enterprises and unrelated diversification of manufacturing in Chinese cities. Using high-dimensional fixed-effect models for panel data in 1999–2012, this article finds that foreign-owned enterprises promote the development of unrelated new industries, and government subsidies strengthen the promotive effect. Heterogeneity analysis shows that the moderating role of government subsidies is significant for enterprises of the western countries, but is insignificant for enterprises from China’s Hong Kong, Macau, and Taiwan regions, and that the promotive effect of foreign-owned enterprises is significant in East China, but insignificant in Central and West China. These findings highlight the role of foreign-owned enterprises and local governments in shaping unrelated diversification in developing countries.

Effect Of Diversification on Organizational Performance of Selected Manufacturing Industries in South West Nigeria

The need for the adoption of diversification strategy became germane because of challenges which impede organizational performance. This study thus examined the effect of diversification on organizational performance of selected manufacturing industries so in south west Nigeria. Some studies of strategic study have investigated on the effect of diversification on organizational performance in manufacturing industries in Nigeria but have come up with inconclusive findings which create a gap that this study wants to fill. The specific objectives of the study are to examine the effect of related diversification on organizational performance and investigate the effect of unrelated diversification on organizational performance in manufacturing industry. Ex-post facto research design was used for the study. The population consists of employees of 22 manufacturing industries listed in Nigerian Exchange Group between 2011-2020 dealing in Food and Beverages, Breweries, Health care/Pharmaceutical and Conglomerates. The sample size comprises eight manufacturing industries with 750 employee’s selected using stratified sampling technique and selected according to 50% proportion of original sample size. Data were drawn from primary and secondary sources. Descriptive statistics was used to explain the respondent’s characteristics and inferential statistics was used to analyze data collected. Findings revealed that related diversification have significant effect on organizational performance F (4, 745) = 11.988, p < 0.01, R= 0.651, R2 = 0.424, and adjusted R2 = 0.419). Unrelated diversification however have significant but negative effect on organizational performance F (4, 745) = 11.982, p < 0.05, R = -0.466, R2 = 0.217, and adjusted R2 = 0.208). The study concluded that related diversification increase organizational performance while unrelated diversif

Business diversification choices: do director incentives matter?

PurposeMuch prior work involving director incentives and corporate behaviour has been focussing on their absolute dollar value or the intrinsic value and generated mixed findings. Comparison theories, however, suggest that the relative value of an incentive may be the main drive for individual performance. This study attempts to investigate the role of director relative pay in promoting the board’s intervention with unrelated diversification decisions.Design/methodology/approachThe analysis uses data from firms operating in more than one segment during the period from 1999 to 2019. Data were obtained from WRDS databases. Ordinary least squares (OLS) regression analysis and the two-stage system generalized method of moments (GMM) were run to test the hypotheses. To test the robustness of the findings, alternative proxies for the key independent variables were used in separate analyses.FindingsThe results support the hypothesis that unrelated diversification negatively impact firm performance, while higher director relative pay will help reduce unrelated business diversification. The absolute director pay, however, has no significant impact on corporate strategic choices. The results also highlight the moderating effect of director overcompensation. Director overcompensation will cancel out the impact of relative director pay on unrelated diversification.Originality/valueThis study takes a fresh theoretical perspective by framing the investigation using the dimensional comparison theory to address the single untended comparison framework in the director pay structure – the intra-individual framework. It is the first to investigate the role of director relative pay in corporate strategic choices. The findings support the contention that the relative value of the incentive is an important indicator of the effectiveness of the pay.

Absorptive capacity components: Performance effects in related and unrelated diversification

We study how firms can benefit from external knowledge resources contingent on absorptive capacity. We separate the three components of absorptive capacity – acquiring, assimilating, and exploiting external knowledge – and posit that the benefits of a firm's knowledge expansion through diversification into related and unrelated business domains differ by the firm's relative emphasis on the three components. We test our predictions on a panel of 153 large US-traded ICT firms. Our analysis broadly supports our hypotheses, highlighting the unique contribution of individual absorptive capacity components to organizational learning through diversification strategy.

Moderating Effect of Government Policies and Regulations on the Relationship Between Diversification Strategies and Organizational Performance Among Star Rated Hotels in the Kenyan Coast

Nowadays, organizations must exploit opportunities and avoid risks by applying relevant strategies and developing various strategic approaches that will improve their competitive edge and overall performance. One of the possible ways to improve business efficiency and performance is through diversification in light of available government policies and regulations. The purpose of this study was to evaluate the moderating effect of government policies and regulations on diversification strategies and organizational performance amidst organizational and environmental forces within star rated hotels in the coast region of Kenya. The specific objectives were; to determine the moderating effects of government policies and regulations on the relationship between diversification strategies and organizational performance among star rated hotels in the Kenyan Coast. Notably, 36 star rated hotels were selected while 419 respondents were involved which comprised; strategic managers, tactical and operational managers. This represented a response rate of 92.4% and 80.6% for the questionnaires and interviews respectively. Stratified sampling was used to select the hotels while purposive sampling was used to select the managers. Questionnaires and interview schedules were used during data collection. Data analyze was both analyzed using both descriptive and inferential analysis. The model summary results indicate that R-Square value improves (from 0.598 to 0.617) when the moderating variable (Government policies and regulations) was added to the regression model. This means that government policies and regulations improve the relationship between related diversification strategies and performance of star rated hotels in the Kenyan Coast. The model summary results in Table 5 show that the value of R-Square improves from 0.558 without the moderating variable to 0.670 with the moderating variable. The moderating variable therefore improves the relationship between unrelated diversification strategies and performance of star rated hotels in the Kenyan Coast. The null hypothesis “Government policies and regulations do not have a significant moderating effect on the relationship diversification strategies with performance of star rated hotels in the Kenyan Coast” was rejected. In conclusion, government policies and regulations have a significant moderating effect on the effect of diversification strategies on performance of star rated hotels, annihilating the simple linear relations between predictor and outcome variables. The government should encourage diversification among hotel industry by providing favourable environment to conduct business through reduced tax and subsidies especially during economic turbulence.

Identifying patterns of countries’ industrial diversification

Technological development is an evolutionary process that often takes place alongside the existing manufacturing industries and is known as related diversification. However, this is not always the case. Research has shown that some countries try to develop differently, meaning that they may begin producing types of products that are very different from those they created before. In this research, we first try to find out which countries adopted a diversification strategy unrelated to the previous stages in their growth path. We did this for 92 countries, with 787 products between 1962 and 2016 and found that in 884 cases (involving several products at different points in time), countries diverged from related diversification and embarked on activities unrelated to their previous ones. In the second step, we investigated these changes from different perspectives, including industries, producing countries, and years, to explore how unrelated diversification may occur. We showed that machinery is an industry that offers many opportunities for manufacturing countries. Not only does it include the newest products, but also it has first ranking in producing unrelated and complex commodities. When considering different countries, it was seen that some countries have had a more successful situation in generating new products during these 54 years. Poland, 334 new products per year is in first position, followed by; Spain (306 new products; and China (279 new products). The data revealed that after 2010 entrance into new activities has been reduced among all nations, suggesting that countries may have found their path of specialization forward and further change has been difficult for them. Europe, with 4184 new products and 358 unrelated products, has the leading place among other continents. Finally, running a logit model shows us that there is a correlation of more than 0.6 between the countries joining continental cooperation organizations such as ASEAN or ECO and moving into manufacturing new products. In other words, we understand that these global contracts facilitate countries in jumping to new activities.

Rural and Urban Family Business Portfolio Growth: The Role of Entrepreneurial Legacy

Applying an inductive case study approach, we analyze four Pakistani family business portfolios and reveal that rural-based family business portfolios tend to grow internally (organically) and through related diversification. In contrast, urban-based portfolios rather grow externally through acquisitions and partnerships and pursue unrelated diversification. The family’s entrepreneurial legacy and how it is transferred to members of the next generation through grooming and imprinting in rural versus urban contexts emerge as a key underlying mechanism.

Understanding Regional Branching: Knowledge Diversification via Inventor and Firm Collaboration Networks

The diversification of regions into new technologies is driven by the degree of relatedness to existing capabilities already present in the region. In cases where opportunities for diversification are rather limited, external knowledge that spills over from neighboring regions or from farther away might become an important driver of regional diversification. Despite the relative importance of interregional knowledge flows via collaborative work, we still have a very limited understanding of how collaboration networks across regions might facilitate diversification processes. The present study investigates the diversification patterns of European metropolitan and nonmetropolitan regions into new knowledge domains via technology classes reported in patent applications to the European Patent Office. The findings indicate that externally oriented inventor collaboration networks increase the likelihood that a new technology specialization enters a region, but this external orientation is less important for related diversification than for unrelated diversification. Further, the results demonstrate that interregional collaboration networks help diversification into unrelated technologies if external knowledge sourcing is based on a diverse set of regions and if collaboration is intense within companies located in distinct regions. Within-firm collaborations across regions can compensate for missing related skills in metropolitan and in nonmetropolitan regions alike but are especially important in nonmetropolitan regions. These results provide new evidence about the importance of knowledge flows within multilocation firms in the technological knowledge diversification of regions.

The policy implications of economic complexity

In recent years economic complexity has grown into an active field of fundamental and applied research. Yet, despite important advances, the policy implications of economic complexity can remain unclear or misunderstood. Here I organize the policy implications of economic complexity in a framework grounded on 4 Ws: what approaches, focused on identifying target activities and/or locations; when approaches, focused on the timing of related and unrelated diversification; where approaches, focused on the geographic diffusion of knowledge; and who approaches, focused on the role played by agents of structural change. The goal of this paper is to provide a framework that groups, organizes, and clarifies the policy implications of economic complexity and facilitates its continued use in regional and international development.

STRATEGIES FOR DIVERSIFICATION OF ENTERPRISE ACTIVITIES: CLASSIFICATION, PRINCIPLES OF IMPLEMENTATION AND STAGES OF DEVELOPMENT

The article is devoted to developing a classification of strategies for the diversification of enterprise activities, the principles of their implementation, and the key stages of development. It is substantiated that diversification strategies of enterprise activities are essential for ensuring sustainability, competitiveness, and development in a changing market environment. It is determined that by sectoral affiliation, mono-sectoral, multi-sectoral, and multi-sectoral unrelated diversification are distinguished. Attention is also focused on vertical, horizontal, concentric, and conglomerate diversification strategies. The essence, advantages, and disadvantages of each of them are defined. Varieties of vertical and horizontal diversification are considered, such as full integration, expansion of the range of products, and expansion by geographical location. The essence of related and unrelated diversification strategies and the possibility of their combination in cross-cutting and mixed strategies are disclosed. It is substantiated that the presented classification provides an opportunity for business owners and managers of enterprises to note and analyze various diversification strategies. It allows them to focus on those strategies that may be most effective in the context of a particular activity, especially in an environment of unstable functioning. The principles of the diversification strategy are clarified: consistency, flexibility, relevance, synergy, innovation, and distribution of risks. The main stages of developing a diversification strategy are presented, which include: analysis of the strengths and weaknesses of the business; determination of the goal, objectives, and expected results of diversification; search for possible areas of diversification; assessment of promising areas of diversification; analysis of the total investment portfolio; making a decision on the most optimal direction of diversification; monitoring the implementation of the diversification strategy.

Corporate Diversification and Firm Performance: Evidence from the Nigerian Banking Sector

Corporate diversification plays an important role in strategic decision-making, especially when it comes to corporate expansion and growth. This study examined the impact of corporate diversification on the financial performance of deposit money banks listed on the Nigerian Stock Exchange. The study covered a ten-year period, from 2010 to 2019, and included data from the annual reports of thirteen listed deposit-taking institutions. Two accounting and one economic measure of firm performance were chosen as indices for the response variables, while the predictor variables were specialisation, related diversification, unrelated diversification and cross-border diversification. Using the panel generalised least square method, the study found that specialisation and related diversification significantly influence firm performance in the Nigerian banking sector. The study, therefore, recommends cross-border geographical expansion for deposit banks in Nigeria while maintaining services in areas of expertise.