Labor flows are important channels for knowledge spillovers between firms; yet competing arguments provide different explanations for this mechanism. Firstly, productivity differences between the source and recipient firms have been found to drive these spillovers; secondly, previous evidence suggests that labor flows from multinational enterprises (MNEs) provide productivity gains for firms; and thirdly, industry relatedness across firms have been found important, because industry-specific skills have an impact on organizational learning and production. In this paper, we aim to disentangle the effects of productivity gap, multinational experience and industry relatedness in a common framework. Hungarian employee-employer linked panel data from 2003-2011 imply that the incoming labor from more productive firms is associated with increasing future productivity. The impact of multinational spillovers cannot be confirmed, once productivity differences between the firms are taken into account. Furthermore, we find that flows from related industries outperform the effect of flows from same and unrelated industries even if we control for the effects of productivity gap and multinational spillovers.

Multiproduct firms often diversify into technologically related activities to exploit efficiencies of joint production; however, unrelated products in the company’s portfolio provide access to distinct markets and can help to avoid industry-specific shocks. Yet, the underlying mechanisms of related and unrelated diversification are still poorly understood. Here we investigate diversification decisions of firms in periods when corporations’ markets are hit by a demand shocks. In these times, cost efficiency considerations might drive firms to reduce costs by narrowing product portfolios and focusing on combinations of technologically related products, in which economies of scope and mutual capabilities can be exploited. To test this hypothesis, we consider two measures of demand shocks, decreasing sales volumes on the product market and increasing import competition; and analyze their association with changes of product portfolios of Hungarian firms in the 2003-2012 period. We find that production has become more coherent in terms of technological relatedness after firms were exposed to demand shocks. Evidence suggests related adjustment of firm production after demand shocks such that products unrelated to firms’ core product are dropped from the portfolio but related products are added.