The Diversification Decision: the Economics of the Manager's Perspective.

In this study we try to identify the factors that (a) determine the decision of a firm to diversify, (b) determine the type of market (related or unrelated) to be entered, and (c) determine the mode of entry (acquisition or denovo) in such markets. The theoretical predictors are arrived at by using the following principles. (a) The presence of excess resources coupled with market failure to trade in these resources provide the basic economic impetus for diversification. (b) Managers within a firm decide on strategic moves based on information which is more often than not unavailable to the market at large. By classifying the resources available with a firm into three categories, we are able to make predictions about the type of markets a firm would prefer to enter. The predictions about mode of entry were based on an economic analysis of the two modes of entry, modified by principle (b) above. The theoretical models were tested on a sample of 177 diversification moves. The results show that there is a statistical relationship between the different class of resources and the types of diversification. A single equation estimation of the predictions regarding the mode of entry provides only partial support for the predictions. However, when we explicitly incorporate the interdependence of the mode of entry and the type of entry in a simultaneous equation framework, almost all theoretical predictions are supported with a high degree of statistical significance. We reach the specific conclusion that the decision regarding the mode of entry is heavily influenced by the decision regarding the type of entered market but not vice versa.PhDManagementUniversity of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/160773/1/8600421.pd