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Efficiency or Bounded Rationality? Drivers of Firm Diversification Strategies in Vietnam

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  • Hien Thu Tran

    ()

  • Enrico Santarelli

    ()

  • Enrico Zaninotto

    ()

Abstract

Considering the case of diversified firms within a transition country such as Vietnam, this paper investigates diversification relatedness taking into account both firm-specific and industry-level components. Two measures of relatedness, the survivor-based and the SIC distances approach, are used to investigate the choice of destination industry by diversifying firms. The conflicting result between these two relatedness index suggests that there has been a trend of imitation and follow-up among inexperienced firms that resemble the direction and intensity of diversification of dominating players within the industry (herd behavior). Accordingly, a higher survivor-based index does not lead to a superior entrepreneurial performance. However, diversified firms gain experience overtime and choose more efficient business combinations in subsequent entries. Consistently with our previous findings, the classical SIC-based approach affirms again that greater diversification raises profitability, but just to an optimum relatedness point beyond which the positive effect starts to fade away. To control for the endogeneity of diversification relatedness and serial correlation of error terms we adoptinstrumental-variable two-stage least-squares estimation (IV-2SLS) with GMM treatment.

Suggested Citation

  • Hien Thu Tran & Enrico Santarelli & Enrico Zaninotto, 2014. "Efficiency or Bounded Rationality? Drivers of Firm Diversification Strategies in Vietnam," DEM Discussion Papers 2014/04, Department of Economics and Management.
  • Handle: RePEc:trn:utwpem:2014/04
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    Cited by:

    1. Enrico Santarelli & Hien Thu Tran, 2016. "Diversification strategies and firm performance in Vietnam," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 24(1), pages 31-68, January.
    2. repec:kap:jtecht:v:42:y:2017:i:5:d:10.1007_s10961-016-9475-6 is not listed on IDEAS

    More about this item

    Keywords

    Firm diversification; firm performance; bounded rationality; transition economy;

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L29 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Other
    • P23 - Economic Systems - - Socialist Systems and Transition Economies - - - Factor and Product Markets; Industry Studies; Population

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