What's the Matter with Relatedness?

A core proposition of the resource-based view of the firm is that related diversification is more efficient than unrelated diversification. Nevertheless, the empirical evidence is usually described as mixed or unstable. We empirically examine three possible explanations for the nature of these findings. One is that they reflect measurement problems. Another is that they reflect a failure to take the resource-based view far enough in terms of recognizing firm heterogeneity. The third is that the resource-based view is misspecified: relatedness is not a significant determinant of efficiency. We use a detailed line-of-business sample to examine these three explanations. Our findings clearly indicate that the main problem is measurement, and we describe an approach to overcoming these problems