IDEAS home Printed from https://ideas.repec.org/p/stc/stcp3e/2000150e.html
   My bibliography  Save this paper

Patterns of Corporate Diversification in Canada: An Empirical Analysis

Author

Listed:
  • Peters, Alice
  • Beckstead, Desmond
  • Gellatly, Guy
  • Baldwin, John R.
  • Yates, Janice

Abstract

Using a comprehensive micro-database of Canadian firms in conjunction with industry-level data on commodity flows, we develop a profile of corporate diversification within the Canadian economy. Our analysis has two major objectives. First, we decompose corporate diversification into horizontal and vertical components based on the degree to which industries are linked by inter-industry trade flows. Horizontal and vertical decompositions serve as useful proxies for the strategic factors that underlie diversification strategies. We find that over 80% of corporate diversification is horizontal in nature, occurring across industries that do not exhibit strong buyer/seller relationships. In the main, this suggests that many firms pursue diversification strategies in order to spread risk and to take advantage of special assets, more so than as a means of improving vertical efficiencies. Seventy-one percent of corporate diversification is also broad-spectrum, representing an expansion of corporate activities across (as opposed to within) 2-digit industry groups. Our second objective is to ascertain whether diversification patterns are closely associated with certain industry characteristics. Here we consider industry-level factors that are generally posited to affect the level of diversification (e.g., growth, concentration, knowledge-intensity) along with other variables designed to evaluate whether diversified ownership structures are associated with inter-industry commodity flows. Our regression analysis draws on three empirical measures of diversification: first, the amount of total entropy (i.e., diversification) within an industry; second, the average entropy per firm; and last, the percentage of firms within an industry that diversify. Within our sample of 132 commercial industries, total diversification is positively associated with the intensity of inter-industry trade flows. Hence, the more diversified an industry's buyer/seller linkages with other sectors, the greater the level of corporate diversification that one would expect to find. This provides some evidence that inter-industry trade intensity plays a significant role in explaining overall levels of corporate diversification, where this level is, in turn, determined by (i) the number of diversified firms, and (ii) the average level of diversification within these firms. This said, inter-industry trade flows are not related to the average level of diversification (the second of these effects), nor do they help explain the percentage of firms within an industry that become diversified. On these issues, we look to other factors for explanation. Industry concentration and average firm size are both positively associated with the amount of diversification per firm. This is consistent with the "constrained optimization" view of diversification - large firms in concentrated markets look to diversification strategies as a means of achieving growth, as the potential for fu

Suggested Citation

  • Peters, Alice & Beckstead, Desmond & Gellatly, Guy & Baldwin, John R. & Yates, Janice, 2000. "Patterns of Corporate Diversification in Canada: An Empirical Analysis," Analytical Studies Branch Research Paper Series 2000150e, Statistics Canada, Analytical Studies Branch.
    • Handle: RePEc:stc:stcp3e:2000150e
    as

    Download full text from publisher

    File URL: https://www150.statcan.gc.ca/n1/en/catalogue/11F0019M2000150
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Sushil Vachani, 1991. "Distinguishing Between Related and Unrelated International Geographic Diversification: A Comprehensive Measure of Global Diversification," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 22(2), pages 307-322, June.
    2. Ernest H. Hall & Caron H. St. John, 1994. "A methodological note on diversity measurement," Strategic Management Journal, Wiley Blackwell, vol. 15(2), pages 153-168, February.
    3. Gorecki, Paul K, 1975. "An Inter-Industry Analysis of Diversification in the U.K. Manufacturing Sector," Journal of Industrial Economics, Wiley Blackwell, vol. 24(2), pages 131-146, December.
    4. B. Espen Eckbo, 1986. "Mergers and the Market for Corporate Control: The Canadian Evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 19(2), pages 236-260, May.
    5. Clarke, R & Davies, S W, 1983. "Aggregate Concentration, Market Concentration and Diversification," Economic Journal, Royal Economic Society, vol. 93(369), pages 182-192, March.
    6. Maddigan, Ruth J, 1981. "The Measurement of Vertical Integration," The Review of Economics and Statistics, MIT Press, vol. 63(3), pages 328-335, August.
    7. MacDonald, James M, 1985. "R and D and the Directions of Diversification," The Review of Economics and Statistics, MIT Press, vol. 67(4), pages 583-590, November.
    8. Rhoades, Stephen A, 1973. "The Effect of Diversification on Industry Profit Performance in 241 Manufacturing Industries: 1963," The Review of Economics and Statistics, MIT Press, vol. 55(2), pages 146-155, May.
    9. Scherer, F M, 1988. "Corporate Takeovers: The Efficiency Arguments," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 69-82, Winter.
    10. Grant, R M, 1977. "The Determinants of the Inter-Industry Pattern of Diversification by U.K. Manufacturing Enterprises," Bulletin of Economic Research, Wiley Blackwell, vol. 29(2), pages 84-95, November.
    11. Jacquemin, Alexis P & Berry, Charles H, 1979. "Entropy Measure of Diversification and Corporate Growth," Journal of Industrial Economics, Wiley Blackwell, vol. 27(4), pages 359-369, June.
    12. Michael Gort, 1962. "Diversification and Integration in American Industry," NBER Books, National Bureau of Economic Research, Inc, number gort62-1, May.
    13. Rhoades, Stephen A, 1974. "A Further Evaluation of the Effect of Diversification on Industry Profit Performance," The Review of Economics and Statistics, MIT Press, vol. 56(4), pages 557-559, November.
    14. Pan A. Yotopoulos & Jeffrey B. Nugent, 1973. "A Balanced-Growth Version of the Linkage Hypothesis: A Test," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 87(2), pages 157-171.
    15. Lemelin, Andre, 1982. "Relatedness in the Patterns of Interindustry Diversification," The Review of Economics and Statistics, MIT Press, vol. 64(4), pages 646-657, November.
    16. Miller, Richard A, 1969. "Market Structure and Industrial Performance: Relation of Profit Rates to Concentration, Advertising Intensity, and Diversity," Journal of Industrial Economics, Wiley Blackwell, vol. 17(2), pages 104-118, April.
    17. Lecraw, Donald J, 1984. "Diversification Strategy and Performance," Journal of Industrial Economics, Wiley Blackwell, vol. 33(2), pages 179-198, December.
    18. Vasudevan Ramanujam & P. Varadarajan, 1989. "Research on corporate diversification: A synthesis," Strategic Management Journal, Wiley Blackwell, vol. 10(6), pages 523-551, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Beckstead, Desmond Burrows, Sëan Gellatly, Guy, 2007. "New Economy: Using National Accounting Architecture to Estimate the Size of the High-technology Economy," The Canadian Economy in Transition 2007015e, Statistics Canada, Economic Analysis Division.
    2. Baldwin, John R. Beckstead, Desmond Brown, W. Mark, 2003. "Hollowing-out, Trimming-down or Scaling-up? An Analysis of Head Offices in Canada, 1999 to 2002," Economic Analysis (EA) Research Paper Series 2003019e, Statistics Canada, Analytical Studies Branch.
    3. Baldwin, John R. Gellatly, Guy, 2007. "Global Links: Multinationals in Canada: An Overview of Research at Statistics Canada," The Canadian Economy in Transition 2007014e, Statistics Canada, Economic Analysis Division.
    4. Grossmann, Volker, 2007. "Firm size and diversification: Multiproduct firms in asymmetric oligopoly," International Journal of Industrial Organization, Elsevier, vol. 25(1), pages 51-67, February.
    5. Laura Rondi & Davide Vannoni, 2005. "Are EU Leading Firms Returning to Core Business? Evidence on Refocusing and Relatedness in a Period of Market Integration," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 27(2), pages 125-145, September.
    6. Cucculelli, Marco & Le Breton-Miller, Isabelle & Miller, Danny, 2016. "Product innovation, firm renewal and family governance," Journal of Family Business Strategy, Elsevier, vol. 7(2), pages 90-104.
    7. Gellatly, Guy Riding, Allan Thornhill, Stewart, 2003. "Growth History, Knowledge Intensity and Capital Structure in Small Firms," Economic Analysis (EA) Research Paper Series 2003006e, Statistics Canada, Analytical Studies Branch.
    8. Stewart Thornhill & Guy Gellatly & Allan Riding, 2003. "Growth history, knowledge intensity and capital structure in small firms," Venture Capital, Taylor & Francis Journals, vol. 6(1), pages 73-89, October.
    9. Martin, John D. & Sayrak, Akin, 2003. "Corporate diversification and shareholder value: a survey of recent literature," Journal of Corporate Finance, Elsevier, vol. 9(1), pages 37-57, January.
    10. Peters, Alice & Baldwin, John R., 2001. "Innovation and Connectivity: The Nature of Market Linkages and Innovation Networks in Canadian Manufacturing Industries," Analytical Studies Branch Research Paper Series 2001165e, Statistics Canada, Analytical Studies Branch.
    11. Beckstead, Desmond & Caves, Richard & Baldwin, John R., 2002. "Changes in the Diversification of Canadian Manufacturing Firms and Plants (1973-1997): A Move to Specialization," Analytical Studies Branch Research Paper Series 2002179e, Statistics Canada, Analytical Studies Branch.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Beckstead, Desmond & Caves, Richard & Baldwin, John R., 2002. "Changes in the Diversification of Canadian Manufacturing Firms and Plants (1973-1997): A Move to Specialization," Analytical Studies Branch Research Paper Series 2002179e, Statistics Canada, Analytical Studies Branch.
    2. Guerras-Martín, Luis Ángel & Ronda-Pupo, Guillermo Armando & Zúñiga-Vicente, José Ángel & Benito-Osorio, Diana, 2020. "Half a century of research on corporate diversification: A new comprehensive framework," Journal of Business Research, Elsevier, vol. 114(C), pages 124-141.
    3. John R. Baldwin & Richard E. Caves & Wulong Gu, 2005. "Responses to Trade Liberalization: Changes in Product Diversification in Foreign- and Domestic-Controlled Plants," Chapters, in: Lorraine Eden & Wendy Dobson (ed.), Governance, Multinationals and Growth, chapter 10, Edward Elgar Publishing.
    4. Beckstead, Desmond & Caves, Richard & Baldwin, John R., 2002. "Changements observes au niveau de la diversification des entreprises du secteur canadien de la fabrication (de 1973 a 1997)," Direction des études analytiques : documents de recherche 2002179f, Statistics Canada, Direction des études analytiques.
    5. Mueller, Dennis C., 1996. "Lessons from the United States's antitrust history," International Journal of Industrial Organization, Elsevier, vol. 14(4), pages 415-445, June.
    6. Baldwin, John R. Caves, Richard Gu, Wulong, 2005. "Réactions à la libéralisation des échanges : changements observés au niveau de la diversification des produits dans les usines sous contrôle étranger et canadien," Série de documents de recherche sur l'analyse économique (AE) 2005031f, Statistics Canada, Direction des études analytiques.
    7. Cynthia A. Montgomery, 1994. "Corporate Diversificaton," Journal of Economic Perspectives, American Economic Association, vol. 8(3), pages 163-178, Summer.
    8. repec:ehu:cuader:33227 is not listed on IDEAS
    9. David J. Bryce & Sidney G. Winter, 2009. "A General Interindustry Relatedness Index," Management Science, INFORMS, vol. 55(9), pages 1570-1585, September.
    10. Martynova, M. & Renneboog, L.D.R., 2005. "Takeover Waves : Triggers, Performance and Motives," Other publications TiSEM ed134639-33ef-4720-9935-e, Tilburg University, School of Economics and Management.
    11. Muller, Ralf & Steinert, Martin & Teufel, Stephanie, 2008. "Successful diversification strategies of electricity companies: An explorative empirical study on the success of different diversification strategies of German electricity companies in the wake of the," Energy Policy, Elsevier, vol. 36(1), pages 398-412, January.
    12. Di Giannatale, Paolo & Passarelli, Francesco, 2018. "Integration contracts and asset complementarity: Theory and evidence from US data," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 192-222.
    13. Villalonga, Belen, 2000. "Does Diversification Cause the “Diversification Discount”?," University of California at Los Angeles, Anderson Graduate School of Management qt40v212gm, Anderson Graduate School of Management, UCLA.
    14. Aparna Bhatia & Anu Thakur, 2016. "Diversification Strategies of Multi-national and Domestic Companies in India: A Comparative Evaluation in the Dynamic Environment," Management and Labour Studies, XLRI Jamshedpur, School of Business Management & Human Resources, vol. 41(3), pages 199-215, August.
    15. Martynova, M., 2006. "The market for corporate control and corporate governance regulation in Europe," Other publications TiSEM 8651e281-4914-41f2-ac14-1, Tilburg University, School of Economics and Management.
    16. Paul Bishop & Peter Gripaios, 2007. "Explaining Spatial Patterns of Industrial Diversity: An Analysis of Sub-regions in Great Britain," Urban Studies, Urban Studies Journal Limited, vol. 44(9), pages 1739-1757, August.
    17. Narander Kumar Nigam & C. P. Gupta, 2023. "Negative Related Diversification, Positive Related Diversification and Firm’s Performance: Measurement and Application," Global Business Review, International Management Institute, vol. 24(1), pages 48-67, February.
    18. Davide Vannoni, 2000. "Diversification, the Resource View and Productivity: Evidence from Italian Manufacturing Firms," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 27(1), pages 47-63, March.
    19. Rene Söllner, 2010. "Product Diversification and Labor Productivity Dispersion in German Manufacturing Industries," Jena Economics Research Papers 2010-028, Friedrich-Schiller-University Jena.
    20. Manral, Lalit & Harrigan, Kathryn R., 2018. "The logic of demand-side diversification: Evidence from the US telecommunications sector, 1990–1996," Journal of Business Research, Elsevier, vol. 85(C), pages 127-141.
    21. Magda Bianco, 1997. "Diversification and Synergies: Effects on Profitability," STICERD - Economics of Industry Papers 17, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:stc:stcp3e:2000150e. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Mark Brown (email available below). General contact details of provider: https://edirc.repec.org/data/stagvca.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.