Diversification and firm performance: A study of Indian manufacturing firms

Archana Ravichandran and Saumitra Bhaduri

MPRA Paper from University Library of Munich, Germany

Abstract: The advantages and disadvantages of diversification and its impact on productivity or performance of a firm have been debated upon by academics and business professionals all over, although views on the topic still differ widely. While popular views are that related diversification increases value and unrelated diversification decreases value, the results of research conducted on the effects of overall diversification (without distinguishing between related and unrelated diversification) on productivity are of conflicting nature. This paper focuses on this relationship in the context of the Indian manufacturing sector. Along with this, it also expounds on the existence of an optimal diversification point for the Indian context. Data used is obtained from CMIE Prowess for the period 2003 to 2014 and standard econometric analysis on panel data is carried out to find the stated relationship. Tobin’s q is used as a measure of performance of the firm. The results show that highly diversified firms perform poorly on account of vertical diversification while horizontal diversification has a positive effect on performance.

Keywords: productivity; diversification; Tobin’s q; related; unrelated (search for similar items in EconPapers)
JEL-codes: D22 L25 (search for similar items in EconPapers)
Date: 2015-06
New Economics Papers: this item is included in nep-bec, nep-cse, nep-eff, nep-ind and nep-sbm
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