Resources, Adjustments, and Diversification: Evidence from Production Functions

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