The Diversification of Production

MOST FIRMS TODAY produce more than one product. In this sense their production is diversified, or horizontally integrated. This paper ad-dresses two questions. First, why have firms become more diversified over the past century? And second, why are diversified firms more oriented toward research and development (R&D) than nondiversified firms? I tackle these two questions under the assumption that a firm diver-sifies to maximize its efficiency. Economists have often argued that a firm reaps efficiency gains when it diversifies its production because its managerial and R&D inputs can be shared among its various activ-ities: The sphere in which diversification is most likely to produce economies of scale is research and develoment. Although the information thus far gathered on this question is inconclusive, it is reasonable to say that a firm with a wide range of products has many opportunities for exploiting the results of a program of research. This is because the directions in which research will produce results are to a large extent unpredictable. Consequently, the greater the range of activities, the higher are the chances that a discovery or development in technology will fit into the firms' existing product structure. In this sense, economies are related not so much to size in terms of output or investment as to the range of good