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Are Tradeoffs Inherent in Diversification Moves? A Simultaneous Model for Type of Diversification and Mode of Expansion Decisions

  • Sayan Chatterjee

    (The Weatherhead School of Management, Case Western Reserve University, Cleveland, Ohio 44106)

  • Jagdip Singh

    (The Weatherhead School of Management, Case Western Reserve University, Cleveland, Ohio 44106)

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    Drawing on the premise that the diversification decisions are driven by antecedent factors such as a firm's existing resources (Teece 1982) and industry structural conditions, this paper develops formal hypotheses for reciprocity between the type of diversification and mode of expansion decisions. We consider the specificity of antecedent resources that affect these two decisions and conceptually demonstrate that there is a contradictory tension in trying to optimize the decisions jointly implying that one or both diversification decisions have to be sub-optimized (i.e., there has to be a trade-off). We make a conceptual argument that this sub-optimization is likely to be in the form of subordination of the mode decision subject to constraints imposed by resources that are highly specific to the mode decision. Following this, we empirically investigate this contradictory tension by using a simultaneous equation model (SEM) on a large sample of firms between 1981 and 1989. The results suggest that one antecedent factor---internal funds---act as the key mediating influence in the joint optimization and leads to a subordination of the mode decision in the joint optimization process. However, the existence of time compression economies and market power benefits are the exceptions to this subordination and trade off process.

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    File URL: http://dx.doi.org/10.1287/mnsc.45.1.25
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    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 45 (1999)
    Issue (Month): 1 (January)
    Pages: 25-41

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    Handle: RePEc:inm:ormnsc:v:45:y:1999:i:1:p:25-41
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    1. Brent D Wilson, 1980. "The Propensity of Multinational Companies to Expand Through Acquisitions," Journal of International Business Studies, Palgrave Macmillan, vol. 11(1), pages 59-64, March.
    2. Jean-Fran├žois Hennart & Young-Ryeol Park, 1993. "Greenfield vs. Acquisition: The Strategy of Japanese Investors in the United States," Management Science, INFORMS, vol. 39(9), pages 1054-1070, September.
    3. Teece, David J., 1982. "Towards an economic theory of the multiproduct firm," Journal of Economic Behavior & Organization, Elsevier, vol. 3(1), pages 39-63, March.
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