Patterns of Corporate Diversification in Canada: An Empirical Analysis

Abstract

Using a comprehensive micro-database of Canadian firms in conjunction with industry-level data on commodity flows, we develop a profile of corporate diversification within the Canadian economy. Our analysis has two major objectives.First, we decompose corporate diversification into horizontal and vertical components based on the degree to which industries are linked by inter-industry trade flows. Horizontal and vertical decompositions serve as useful proxies for the strategic factors that underlie diversification strategies. We find that over 80% of corporate diversification is horizontal in nature -occurring across industries that do not exhibit strong buyer/seller relationships. In the main, this suggests that many firms pursue diversification strategies in order to spread risk and to take advantage of special assets, more so than as a means of improving vertical efficiencies. Seventy-one percent of corporate diversification is also broad-spectrum -representing an expansion of corporate activities across (as opposed to within) 2-digit industry groups.Our second objective is to ascertain whether diversification patterns are closely associated with certain industry characteristics. Here we consider industry-level factors that are generally posited to affect the level of diversification (e.g., growth, concentration, knowledge-intensity) along with other variables designed to evaluate whether diversified ownership structures are associated with inter-industry commodity flows. Our regression analysis draws on three empirical measures of diversification -first, the amount of total entropy (i.e., diversification) within an industry, second, the average entropy per firm, and last, the percentage of firms within an industry that diversify.Within our sample of 132 commercial industries, total diversification is positively associated with the intensity of inter-industry trade flows. Hence, the more diversified an industry's buyer/seller linkages with other sectors, the greater the level of corporate diversification that one would expect to find. This provides some evidence that inter-industry trade intensity plays a significant role in explaining overall levels of corporate diversification, where this level is, in turn, determined by (i) the number of diversified firms, and (ii) the average level of diversification within these firms. This said, inter-industry trade flows are not related to the average level of diversification, nor do they help explain the percentage of firms within an industry that become diversified. On these issues, we look to other factors for explanation. Industry concentration and average firm size are both positively associated with the amount of diversification per firm. This is consistent with the 'constrained optimization' view of diversification -large firms in concentrated markets look to diversification strategies as a means of achieving growth, as the potential for further expansion in main product areas is often exhausted.Sectoral differences in diversification patterns are apparent. A grea...

Growth history, knowledge intensity and capital structure in small firms

“…5 For background on entropy measures, see Jacquemin and Berry (1979). For an example of a recent study that makes extensive use of entropy calculations, see Baldwin et al (2000b). 6 Note that entropy statistics are based on the distribution of financing across the full range of individual instruments (as opposed to our four instrument groups: equity, short-term debt, long-term debt, and others), and can thus in the present case take a maximum value of 12.…”

Un enfoque regional para estudiar la diversidad industrial en la Argentina (1996-2012)

“…Por otro lado, los trabajos empíricos relacionados con el enfoque de las capacidades y los recursos se enfrentan con la dificultad de identificarlos adecuadamente. Las contribuciones existentes cuantifican las capacidades regionales a partir de la incorporación de variables sustitutas (proxy) como la intensidad en investigación y desarrollo (I+D) (Aw y Batra, 1998; Parteka y Tamberi, 2011), la proporción de gerentes o responsables técnicos en el total del empleo industrial (Baldwin y otros, 2000), el número de empleados en industrias basadas en ciencia y técnica (Baldwin y otros, 2000;Bishop y Gripaios, 2007) o el nivel educativo de la población (Parteka y Tamberi, 2011).…”

A regional approach to the study of industrial diversity in Argentina (1996–2012)

“…Moreover, empirical studies that adopt a resources-and capabilities-based approach are faced with the difficulty of proper identification. Existing research quantifies regional capabilities by using proxy variables such as research and development (R&D) intensity (Aw and Batra, 1998;Parteka and Tamberi, 2011); the ratio of managers or technical personnel to total industry employment (Baldwin and others, 2000); number of employees in science-and technology-based industries (Baldwin and others, 2000;Bishop and Gripaios, 2007); or the educational level of the population (Parteka and Tamberi, 2011). Some empirical studies link the degree of diversity of a region or country with its level of development, measured in terms of per capita gross domestic product (GDP).…”