THE DYNAMICS OF DIVERSIFICATION: MARKET ENTRY AND EXIT BY PUBLIC AND PRIVATE FIRMS

Research summary: We replicate one of the first studies on the dynamics of diversification, Chang (1996). Our sample of public and private firms from 1992 to 2001 yields findings similar to the earlier research. Firms tend to enter new markets that have human resource profiles that are similar to the firms' existing businesses, and exit markets that have dissimilar human resource profiles. This general finding is robust to alternative specifications and controls, including the timing of market entry and technological diversification. However, we also find that entry and exit by private firms is much more prevalent than that by public firms. Differences in how public and private firms diversify based on knowledge similarity invite further research in evolutionary economics. Managerial summary: Chang (1996) revealed that large, public manufacturing firms in the 1980s tended to enter new businesses that leveraged the firm's knowledge, some of which is embedded in routines among employees sharing similar occupations. The new businesses provide the basis for further expansion, while a firm divests businesses that do not stay profitable, or which no longer match the firm's new portfolio of businesses. Our data show that these patterns continued in the 1990s. Our sample also includes private firms, which conduct the majority of market entry and exit. Private firms enter new businesses with different proportions of scientific and marketing personnel than their existing operations. Thus, diversification still reflects knowledge resources for smaller, private firms, but differently than for the largest firms in the economy. Copyright (C) 2016 John Wiley & Sons, Ltd.