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What a firm produces matters: diversi cation, coherence and performance of Indian manufacturing

Author

Listed:
  • Dosi, Giovanni

    () (Institute of Economics, Sant'Anna School of Advanced Studies, Pisa)

  • Mathew, Nanditha

    () (UNU-MERIT, and Institute of Economics, Sant'Anna School of Advanced Studies, Pisa, and IBIMET-CNR, Florence)

  • Pugliese, Emanuele

    () (European Commission, Joint Research Centre (JRC), Seville, Institute of Complex Systems, CNR, Rome)

Abstract

Economic growth and development of a country involves accumulation of knowledge and dynamic capabilities (Cimoli et al., 2009). Past research has begun to investigate the capability accumulation and macro-economic development of countries and sectors (Dosi et al., 1990), also by means of introduction of new products (Hausmann and Rodrik, 2003). In this work, recognizing that firms are the actual domain in which production takes place, we focus on the firm-level process of capability accumulation and diversification in a developing country. We investigate the relationship between diversification (and coherent diversification) and firm performance by employing an extensive database of Indian manufacturing firms with detailed information on product mix of firms. We claim that such an understanding of firms' incentives to diversify is relevant not only for the corporate management, but also for the diversification of countries and thereby its development. First, we explore the reasons behind firms' strategy to diversify, i.e, which firms choose a broad product scope and whether the change in the scope of the firm results in improved performance in terms of firm profitability and sales growth. Second, we look at the idiosyncratic characteristics of different products, by emphasizing the synergies of a product line with respect to the overall product basket of the firm. In this line, we develop a measure that captures the synergies and economies of scope between different products, and observe that the firms' future performance crucially depend on the interactions between the products that comprise its basket. Overall, our results are consistent with an intangible- capabilities model of firm diversification: diversification results in improved firm performance if the firm has underused capabilities and the new production line is able to exploit them.

Suggested Citation

  • Dosi, Giovanni & Mathew, Nanditha & Pugliese, Emanuele, 2019. "What a firm produces matters: diversi cation, coherence and performance of Indian manufacturing," MERIT Working Papers 013, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  • Handle: RePEc:unm:unumer:2019013
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    File URL: https://www.merit.unu.edu/publications/wppdf/2019/wp2019-013.pdf
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    References listed on IDEAS

    as
    1. Andrea Zaccaria & Matthieu Cristelli & Andrea Tacchella & Luciano Pietronero, 2014. "How the Taxonomy of Products Drives the Economic Development of Countries," Papers 1408.2138, arXiv.org.
    2. Vojislav Maksimovic & Gordon Phillips, 2002. "Do Conglomerate Firms Allocate Resources Inefficiently Across Industries? Theory and Evidence," Journal of Finance, American Finance Association, vol. 57(2), pages 721-767, April.
    3. repec:bla:stratm:v:16:y:1995:i:4:p:277-299 is not listed on IDEAS
    4. Nanditha Mathew, 2017. "Drivers of firm growth: micro-evidence from Indian manufacturing," Journal of Evolutionary Economics, Springer, vol. 27(3), pages 585-611, July.
    5. Stefano Valvano & Davide Vannoni, 2003. "Diversification Strategies and Corporate Coherence Evidence from Italian Leading Firms," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 23(1), pages 25-41, August.
    6. Giovanni Dosi & Marco Grazzi & Daniele Moschella, 2017. "What do firms know? What do they produce? A new look at the relationship between patenting profiles and patterns of product diversification," Small Business Economics, Springer, vol. 48(2), pages 413-429, February.
    7. Dosi, Giovanni & Grazzi, Marco & Mathew, Nanditha, 2017. "The cost-quantity relations and the diverse patterns of “learning by doing”: Evidence from India," Research Policy, Elsevier, vol. 46(10), pages 1873-1886.
    8. Giovanni Dosi & Keith Pavitt & Luc Soete, 1990. "The Economics of Technical Change and International Trade," LEM Book Series, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy, number dosietal-1990, August.
    9. repec:bla:stratm:v:20:y:1999:i:8:p:711-727 is not listed on IDEAS
    10. Giovanni Dosi & Marco Faillo & Luigi Marengo, 2003. "Organizational Capabilities, Patterns of Knowledge Accumulation and Governance Structures in Business Firms. An Introduction," LEM Papers Series 2003/11, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    11. Piscitello, Lucia, 2000. "Relatedness and coherence in technological and product diversification of the world's largest firms," Structural Change and Economic Dynamics, Elsevier, vol. 11(3), pages 295-315, September.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Diversification; Coherence; Endogenous Switching;

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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