1 BROADENING FOCUS: SPILLOVERS AND THE BENEFITS OF SPECIALIZATION IN THE HOSPITAL INDUSTRY

The long-standing argument that focused operations outperform others stands in contrast to theory and evidence supporting a broader scope for organizations. Explanations for this relationship between focus and firm performance have largely centered on economies of scope achieved by sharing common resources, such as advertising or production capacity, across operating units. We consider whether there are similar benefits to related diversification within an operating unit and examine the mechanism that might generate these benefits. Using data from the hospital industry, we first examine the relationship between focus and clinical performance in cardiovascular care. We find that, on average, focus has at best a weak positive effect on performance. Then, distinguishing between direct and complementary spillovers, we examine: (1) the extent to which a hospital’s specialization in areas related to cardiovascular care directly impacts performance in cardiovascular care (direct spillovers) and (2) whether the marginal benefit of a hospital’s focus in cardiovascular care depends on the degree to which the hospital “co-specializes ” in related areas (complementary spillovers). We find evidence of such complementarities in specialization in our setting