Resources, Adjustments, and Diversification: Evidence from Production Functions
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4277-03.pdf
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178.17 KB
Format
Adobe PDF
Checksum (MD5)
985807b14b8ffc91206b965a51085cde
Author(s)
Wernerfelt, Birger
Date Issued
February 3, 2003
Series/Report no.
MIT Sloan School of Management Working Paper;4277-03
Abstract
The Resource-Based View of the firm (RBV) posits as a necessary condition for
diversification that a firm's resources can be leveraged beyond its original business. To
achieve sufficiency we need to know whether the resource is best leveraged inside the
firm or through a market contract. We therefore couple the RBV with the
Adjustment-Cost Theory of the firm to make and test a set of predictions about when
firms should extend their scope. We find that firm should, and do, extend their
hosizontal and vertical scope when they compete in industries with more fast paced
new product development. Two strong points about the study are (1) Because we are
specific about the theory of the firm invoked, we can make more precise predictions,
and (2) we test the predictions in production functions as well as in estimates of actual
firm scope
Subjects
Diversification
Theory of the Firm
Resource-based View
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