Using Competition to Measure Relatedness

Abstract

The conventional approach to measuring interindustry relatedness uses the Standard Industrial Classification (SIC) system to capture the “distance” between industries. Although relatedness measures based on SIC codes (or equivalent classifications) are readily available and easy to compute, they do not screen effectively for the conditions under which related diversification creates value. This article constructs an alternative, survivor-based measure of interindustry relatedness and compares it to similar measures based on distances between SIC codes. The authors find that survivor-based measures consistently outperform SIC-based measures in predicting firms' decisions to enter new markets, even when herding tendencies and motives related to mutual forbearance are taken into account.

Inter-industry labor flows

“…For instance, relatedness matrices such as the skill-relatedness matrix in this paper have various practical and academic applications, ranging from employment and retraining programs to research in labor economics (Poletaev and Robinson, 2008;Gathmann and Schön-berg, 2010), economic geography (Porter, 2003;Neffke et al, 2011;Boschma et al, 2013), development economics (Hidalgo et al, 2007) and strategic management (e.g., Teece et al, 1994;Farjoun, 1994;Bryce and Winter, 2009;Lien and Klein, 2009). Moreover, our results suggest that analyzing inter-industry flows may offer new ways to study labor markets and the flexibility of a labor force.…”

Firm Behaviour and the Introduction of New exports: Evidence from Brazil

“…The key element that we want to capture is relatedness in terms of firm capabilities to produce products. Since firms' capabilities are very difficult to measure, the existing literature suggests different approximations, ranging from categorical measures to SIC classification distances, input ratios, commodity flows or co-occurrence measures (Lien and Klein 2009). …”

“…As the resource based approach to firm diversification (Lien and Klein (2009)) suggests, firms diversify mainly to those activities where there are existing capabilities within the firm. If concentration of export activities is large, this should be translated into most firm diversification activities being similar or related to existing ones.…”

A Fresh Look at Decision Making in International Investment Choices: Firm International Coherence and Home-Host Country Relatedness

“…The results obtained support our hypotheses. We believe that the home-host country relatedness concept, focused on efficient combinations of countries within actual firms, provides a novel way to examine the attractiveness of countries for international investments, albeit borrowed from work on industry relatedness (Bryce & Winter, 2009;Lien & Klein, 2009;Teece et al, 1994). Through the required empirical work, we also ultimately provide several outcome-based measures of HHCR that complement current indices of country distance and expand their coverage, allowing for truly global research (Franke & Richie, 2010;Tung & Verbeke, 2010).…”

“…Specifically, we argue that country relatedness is best revealed by the actual pattern of investments between any two countries. Even if some of these investments are imperfect or subject to agency concerns, the survivor principle (e.g., Alchian, 1950;Stigler, 1958;Teece et al, 1994) suggests that they ultimately face competitive forces that lead to their modifications (Lien & Klein, 2009). Ultimately, the observed pattern of investments from any one home to host country represents what has 'survived' over time, or country relatedness.…”