Efficiency or Bounded Rationality? Drivers of Firm Diversification Strategies in Vietnam

Hien Thu Tran (), Enrico Santarelli and Enrico Zaninotto ()

No 2014/04, DEM Discussion Papers from Department of Economics and Management

Abstract: Considering the case of diversified firms within a transition country such as Vietnam, this paper investigates diversification relatedness taking into account both firm-specific and industry-level components. Two measures of relatedness, the survivor-based and the SIC distances approach, are used to investigate the choice of destination industry by diversifying firms. The conflicting result between these two relatedness index suggests that there has been a trend of imitation and follow-up among inexperienced firms that resemble the direction and intensity of diversification of dominating players within the industry (herd behavior). Accordingly, a higher survivor-based index does not lead to a superior entrepreneurial performance. However, diversified firms gain experience overtime and choose more efficient business combinations in subsequent entries. Consistently with our previous findings, the classical SIC-based approach affirms again that greater diversification raises profitability, but just to an optimum relatedness point beyond which the positive effect starts to fade away. To control for the endogeneity of diversification relatedness and serial correlation of error terms we adoptinstrumental-variable two-stage least-squares estimation (IV-2SLS) with GMM treatment.

Keywords: Firm diversification; firm performance; bounded rationality; transition economy (search for similar items in EconPapers)
JEL-codes: L25 L29 P23 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-bec, nep-cse, nep-eff, nep-sea and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Efficiency or bounded rationality? Drivers of firm diversification strategies in Vietnam (2015)
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