Diversification and firm performance: A study of Indian manufacturing firms

Ravichandran, Archana and Bhaduri, Saumitra (2015): Diversification and firm performance: A study of Indian manufacturing firms.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: productivity, diversification, Tobin’s q, related, unrelated
• Subjects: D - Microeconomics > D2 - Production and Organizations > D22 - Firm Behavior: Empirical Analysis; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L25 - Firm Performance: Size, Diversification, and Scope

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