Are Tradeoffs Inherent in Diversification Moves? A Simultaneous Model for Type of Diversification and Mode of Expansion Decisions

Sayan Chatterjee and Jagdip Singh
Additional contact information
Sayan Chatterjee: The Weatherhead School of Management, Case Western Reserve University, Cleveland, Ohio 44106
Jagdip Singh: The Weatherhead School of Management, Case Western Reserve University, Cleveland, Ohio 44106

Management Science, 1999, vol. 45, issue 1, 25-41

Abstract: Drawing on the premise that the diversification decisions are driven by antecedent factors such as a firm's existing resources (Teece 1982) and industry structural conditions, this paper develops formal hypotheses for reciprocity between the type of diversification and mode of expansion decisions. We consider the specificity of antecedent resources that affect these two decisions and conceptually demonstrate that there is a contradictory tension in trying to optimize the decisions jointly implying that one or both diversification decisions have to be sub-optimized (i.e., there has to be a trade-off). We make a conceptual argument that this sub-optimization is likely to be in the form of subordination of the mode decision subject to constraints imposed by resources that are highly specific to the mode decision. Following this, we empirically investigate this contradictory tension by using a simultaneous equation model (SEM) on a large sample of firms between 1981 and 1989. The results suggest that one antecedent factor---internal funds---act as the key mediating influence in the joint optimization and leads to a subordination of the mode decision in the joint optimization process. However, the existence of time compression economies and market power benefits are the exceptions to this subordination and trade off process.

Keywords: diversification; relatedness; mode of entry; resource based view (search for similar items in EconPapers)
Date: 1999
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.45.1.25 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:45:y:1999:i:1:p:25-41

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().