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Firm Diversification and the Law of Proportionate Effect

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  • Giulio Bottazzi

Abstract

The paper presents an analysis performed over the worldwide top 150 firms in the pharmaceutical industry. It begins with a test of the Gibrat's Law of Proportionate Effect finding, in line with previous literature, a violation concerning the variance of the growth. Then it shows, using disaggregated data on sub-markets (defined according to the ATC code) that this violation can be completely referred to the existence of a ``diversification'' effect, namely a scale relation between the number of active sub-markets a firm posses and its size. The observed scaling property of the firms diversification patterns is in contrast with the linear assumption typically made in literature. Finally, to interpret the findings, the work proposes a stochastic model for firms diversification which fits quite well the data.

Suggested Citation

  • Giulio Bottazzi, 2001. "Firm Diversification and the Law of Proportionate Effect," LEM Papers Series 2001/01, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  • Handle: RePEc:ssa:lemwps:2001/01
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    Cited by:

    1. Giulio Bottazzi & Angelo Secchi, 2003. "Common Properties and Sectoral Specificities in the Dynamics of U.S. Manufacturing Companies," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 23(3_4), pages 217-232, December.
    2. repec:spr:stmapp:v:14:y:2005:i:1:d:10.1007_bf02511577 is not listed on IDEAS
    3. Charolina CASTALDI & Giovanni Dosi, 2004. "Income Levels and Income Growth: Some New Cross-Country Evidence and some Interpretative Puzzles," DEGIT Conference Papers c009_038, DEGIT, Dynamics, Economic Growth, and International Trade.
    4. Carolina Castaldi & Mishael Milakovic & Angelo Secchi, 2003. "Diversification Patterns in the Growth of Firms: Evidence from Italian Manufacturing," LEM Papers Series 2003/16, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    5. Castaldi, Carolina & Milakovic, Mishael & Secchi, Angelo, 2006. "Scale and technological factors in the diversification structure of business firms," Economics Letters, Elsevier, vol. 91(1), pages 117-121, April.
    6. Sandro Sapio & Grid Thoma, 2006. "The Growth of Industrial Sectors: Theoretical Insights and Empirical Evidence from U.S. Manufacturing," LEM Papers Series 2006/09, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.

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