In this work, we investigate the relationship between the scope and coherence of product basket of firms and their performance by employing an extensive database of Indian manufacturing firms with detailed information on product mix of firms. We show how the effects of the strategic choices of the firms are heterogeneous depending on the firm characteristics. First, we explore the reasons behind each firm’s strategy to diversify, i.e, which firms choose a broad product scope and whether the change in the firm’s scope results in improved firm performance in terms of 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 show how 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 can have a positive impact on firm performance if the firm has underused capabilities and the new production line is able to exploit them.
About Emanuele Pugliese
Emanuele Pugliese is a researcher at the Joint Research Centre of the European Commission, working on Economics of Industrial Research and Innovation. After his Master Thesis in Theoretical Physics, he got a PhD in Economics in the Sant'Anna School for Advanced Studies of Pisa, with a thesis on the effects of innovation on society in general and firms in particular. His research interests are related with Economic Fitness and Complexity – and a capability approach in general – to both microeconomics and macroeconomics.
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