Vol. 6, Núm.

2, Mayo-Agosto 2022

Corporate Diversification and Firm Performance:

Theoretical Boundaries and Proposed Research Agenda.
Salvador Hernández Sánchez1 Abstract
By applying a meta-narrative review approach
and thematic analysis, 202 articles over the period
2000-2020 were evaluated to identify and collate
the literature on corporate diversification and firm
performance into six theoretical perspectives: in-
dustrial economics, resource-based view, agency
Recibido: 08/12/2021 theory, financial perspective, organizational lear-
Aceptado: 09/03/2022 ning and institutional perspective. A novel re-
search agenda is proposed that suggests two alter-
native explanations: the geopolitical and historical
REVISTA RELAYN, Micro y pequeña empresa perspectives. It is concluded that these should be
en Latinoamérica part to the study of corporate diversification and
firm performance.
Disponible en: https://iquatroeditores.com/
revista/index.php/relayn/index Keywords
Corporate Diversification; Review; Historical;
https://doi.org/10.46990/relayn.2022.6.2.580 Geopolitical

Introduction
The theoretical perspectives that explain the re-
lationship between corporate diversification and
firm performance are extensive and diverse. In-
dustrial economic theory asserts that as firms di-
versify firm performance becomes positive due
to a higher market power, economies of scale and
scope and factors related to industry profitability
until a certain point where the performance beco-
mes negative as firms becomes more diverse, theo-
rizing a U-inverted relationship (Palich, Cardinal
& Miller, 2000). The financial approach states that
diversified firms operate with a diversification
discount or at least a constant relationship with
performance; diversification leads to financial
synergies, risk reduction and more debt capacity
that are surmounted by the higher costs of mana-
ging a more diverse firm (Nippa, Pidun & Rubner,
2011). The agency theory declares that diversifi-
cation has a negative relationship with firm per-
formance because managers of the firms diversify
to obtain private benefits and entrench themselves
in the firm at the expense of overall performance
(Aggarwal & Samwick, 2003). The organizational
learning approach suggests that diversified firms

21
Salvador Hernández Sánchez. Corporate Diversification and Firm Performance: Theoretical Boundaries and
Proposed Research Agenda.

acquired knowledge through past diversification experiences, therefore,

firms that diversify multiple times show higher performance due to the
learning process, thus, a positive relationship is expected (Andreou, Lou-
ca & Petrou, 2016). Institutional perspective claims that diversified firms
exhibit a positive performance in emerging economies by compensating
for the inefficiencies of capital, labor and product markets of the country;
however, this relationship becomes negative when diversified firms ope-
rate in developed economies as advantages of diversification tend to disa-
ppear due to institutionally stronger country environments (Benito-Oso-
rio, Guerras- Martin, Zuñiga-Vicente, 2012). The resource-based view
states that a diversified firm possesses a wider range of intangible and va-
luable resources and capabilities that share among business developing sy-
nergies and a positive influence in the relationship with firm performance
(Hauschild & Knyphausen-Aufseß, 2013). These perspectives could help
researchers to understand the heterogeneity of empirical results found in
different studies; positive, negative, non-linear or constant relationships.
Yet, these traditional approaches may not be enough to explain the nature
of this relationship. Therefore, it is discussed that alternative perspectives
might help to explain the heterogeneity of this linkage: the historical and
geopolitical perspectives.

The purpose of this study is to identify and collate the traditional

theoretical perspectives that help to explain the relationship between corpo-
rate diversification and firm performance to propose a research agenda that
includes two alternative perspectives. Thus, the next question is presented:

What are the theoretical perspectives that help to explain the

relationship between corporate diversification and firm performance?

This paper contributes to diversification research in at least

three important ways. First, it reviews and collates the perspectives that
help to explain the relationship between diversification and firm perfor-
mance. Second, it identifies the theoretical rationale, main subtopics and
assumptions of each approach. Third, it proposes a research agenda that
offers two alternative explanations to the study of corporate diversification
and firm performance.

Review Methodology
The review methodology follows the four phases and guidelines of Snyder
(2019).

Phase 1: In the first phase, the literature review is designed. In

designing the review, the plan is to detect the theoretical approaches that
explain the diversification-performance linkage. Thus, an initial scanning
of other literature reviews is performed. As the review evolved, it revealed
a large body of research studied from distinct theoretical approaches with
many subtopics and conducted by different groups of researchers. The-
refore, a semi-systematic or meta-narrative review approach is applied.
Two distinct searching strategies to select studies were employed. The

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first, used the following key terms: ‘Corporate Diversification and perfor-
mance’, ‘Multi-business and performance’, ‘Scope of the firm’, ‘Conglome-
rates and performance’, ‘Diversification literature review’ and ’Diversifica-
tion Meta-Analysis’ within 9 databases, Ebsco Business, Elsevier, Web of
Knowledge, Springer, IEEE, Emerald, JSTOR, ABI/Inform and Pro-quest
to identify all articles that report these words either in the title, abstract
or keywords. The second strategy consists of using forward and backward
citation tracking to find seminal articles iteratively. In specific, literatu-
re review articles were citation-tracked to identify theoretical approaches
and empirical findings. The synthesis includes articles from the last 20
years from 2000 to 2020, also, literature reviews, theoretical and empirical
findings are included in the examination. In addition, articles have to be
written in English and be peer-reviewed.

Phase 2: Conducting the review. The review process is tested on

a smaller sample by reading the abstracts to make the appropriate selec-
tion and then the full analysis of the articles later, before the final selection.
In addition, references in the selected articles are mapped to identify pos-
sible relevant studies. Selected articles are classified into two groups from
the years 2000 to 2010 and from 2011 to 2020 to organize more clearly the
data and also to identify possible trends.

Phase 3: Analysis. Given that various groups of researchers wi-

thin different disciplines have used different theoretical approaches and
subtopics, as well as, different methods and used distinct criteria to analyze
diversification-performance linkage, a thematic analysis is applied rather
than statistical techniques. This qualitative technique is applied to iden-
tify and categorize the articles into each traditional theoretical approach
along with their underlying subtopics. The review is conducted by reading
the abstract, theoretical basis and conclusions of each article in the final
sample. The theoretical rationale and main subtopics of each traditional
approach are identified by coding and contrasting common features in the
articles (Wong, et al., 2013).

Phase 4: Writing the review. The review is written to provide a

clear summary of the theoretical perspectives, their rationale and main
subtopics within each approach. The numbers of articles reviewed, number
of journals and classification of the manuscripts are provided. The classi-
fication is summarized in one table including their logic and assumptions
and, the second table, summarizes the main subtopics and the collection
of authors in the period selected.

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Salvador Hernández Sánchez. Corporate Diversification and Firm Performance: Theoretical Boundaries and
Proposed Research Agenda.

Results
The final sample resulted in 202 articles matching the criteria; 17 were lite-
rature review papers and 185 were theoretical and empirical studies within
91 journals. To summarize the number of documents and source of origin,
the following figure is provided.

Figure 2.1
Scheme of research

The thematic analysis involved, first, familiarizing with diversi-

fication research data and noting initial ideas, then, the coding process is
created where common features across the articles are collected to group
them into potential theoretical themes. An iterative analysis to re-define,
name and synthesize properly the themes resulted in six traditional pers-
pectives, their core logic and main assumptions are summarized in the
next table.

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Table 2.1
Summary of traditional perspectives and their core logic and assumptions.

Theoretical
Core logic and assumptions
perspective
Industrial economics evaluates diversification in terms of its influence on
competition, industry and technical productivity.
Diversified firms may use cash generated through one business to
Industrial
cross-subsidize another increasing market power and generating econo-
economics
mies of scale and scope.
The benefits of diversification can be exploited to only a certain degree of
diversification, stating a U-inverted relationship with performance.
Resource-based view assess diversification with relation to the bundle of
resources and capabilities that can be shared among business.
Resource-ba- Diversified firms develop synergies and a positive moderating impact on
sed view performance by sharing and exploiting related resources.
The benefits of diversification may increase with related resources and
decrease with unrelated resources, asserting a U-inverted relationship.
Agency theory considers diversification in terms of the conflicts of inte-
rest that may arise between managers and stakeholders.
Agency Firm managers diversify to obtain power and compensations, reduce
Theory individual employment risk and entrench themselves in the firm at the
expense of overall performance.
Diversification reduces firm performance due to agency problems.
Financial perspective views diversification regarding its impact on finan-
cial performance, debt capacity and risk reduction.
Financial
Diversified firms operate with a discount in value due to the high costs to
Perspective
run a diversified firm potentially overcoming financial synergies.
Diversification reduces value or at least produces a constant relationship.
Organizational learning evaluates diversification in terms of the learning
process from past experiences and organizational knowledge transfer.
Organizatio- Firms that diversify multiple times have greater performance than single
nal Learning firms due to the learning process and prior diversification experiences.
Diversification increases performance as the firm acquires experience
and learns from prior diversifications.

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Salvador Hernández Sánchez. Corporate Diversification and Firm Performance: Theoretical Boundaries and
Proposed Research Agenda.

Institutional perspective studies diversification emphasizing the influen-

ce of institutional environment, country development and public policy.
Diversified firms exhibit a positive performance in emerging economies
Institutional by compensating for the inefficiencies of capital, labor and product mar-
perspective kets of the country but a negative performance in developed economies
due to the potentially stronger institutions.
Diversification increases performance in emerging economies and redu-
ces it in developed economies.

The analysis of others literature review studies helped to identi-

fy relevant diversification trends, main subtopics and seminal papers that
were citation-tracked forward and backwards (Guerras-Martin et al., 2020;
Schommer et al., 2019; Lüthge, 2018; Ahuja & Novelli, 2017; Mehmood &
Hillman, 2017; Picone & Dagnino, 2016; Dhir & Dhir, 2015; Erdorf et al.,
2013; Weiss, 2013; Hauschild & Knyphausen-Aufseß, 2013; Purkayastha
et al., 2012; Benito-Osorio et al., 2012; Wan et al., 2011; Nippa et al., 2011;
Bausch & Pils, 2009; Martin & Sayrak, 2003; Palich et al., 2000).

Table 2.2
Theoretical perspectives and subtopics on the diversification-performance linkage.

Theoretical Authors
Main Subtopics
Perspectives 2000-2010 2011-2020
1. Market power Liebeskind (2000);Narasimhan Banker, Wattal & Plehn-Du-
2. Industry analysis & Kim (2002); Maksimovic & jowich (2011); Purkayastha
3. Internal capital Phillips (2002); Park (2003); Li & (2013); Zahavi & Lavie
markets Greenwood (2004); Helfat & Eis- (2013); Seru (2014); Matvos
4. Economies of enhardt (2004); Stern &Henderson & Seru (2014); Su & Tsang
scope and scale (2004); Jandik & Makhija (2005); (2015); Hashai (2015); Sun
5. Conglomerates Varanasi (2005); Wiersema & & Govind (2017); La Rocca
Industrial
and group affi- Bowen (2005, 2008); Fukui & Ushi- et al. (2018); Westerman et al.
Economics
liation jima (2006); Yan (2006); Leten et al. (2020)
6. Technology & (2007); Tan et al. (2007); Lafontaine
productivity & Slade (2007); Doukas & Kan
(2008); Tanriverdi & Lee (2008);
Schmid & Walter (2009); He (2009);
Ganco & Agarwal (2009); Çolak, G.
(2010); Rawley (2010)
1. Resources and Geringer et al. (2000); Matsusaka Liu & Hsu (2011); Villasalero
Capabilities (2001); Galunic & Eisenhardt (2013, 2015, 2017)
2. Competitive (2001); Valvano & Vannoni (2003);
advantage Piscitello (2004);Gary (2005);
3. Dynamic capabi- Kor & Leblebici (2005) ; Wang &
Resource lities Barney (2006);Pehrsson (2006);
based view 4. Synergies and Ng (2007); Fang et al. (2007); Chari
knowledge et al. (2008);Døving & Gooder-
5. Heterogeneity of ham (2008);Ravichandran et al.
the firm (2009);Eisenhardt & Martin (2010);
Nath et al. (2010) Lichtenthaler
(2010)

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1. Conflicts of Boot & Schmeits (2000); Sha- El Mehdi & Seboui (2011);
interest ffer & Hillman (2000); Ueng Tong(2011); Dhir & Mital
2. Individual em- & Wells(2001);Cronqvist et al. (2012) Hoechle et al.(2012);
ployment risk (2001);Hyland & Diltz (2002);Tho- La Rocca & Stagliano (2012);
3. Compensations mas (2002); De Motta (2003);Ag- Goetz et al. (2013); Castañer
Agency and perquisites garwal & Samwick (2003);Jensen & & Kavadis (2013); Farooqi et
Theory 4. Entrenchment Zajac (2004); Best et al. (2004);Gong al. (2014); Choe et al. (2014)
incentive et al. (2007); Xiaorong & Rwegasira Ataullah et al. (2014); Sta-
(2008);Lim et al. (2008) ;Jiraporn et gliano et al. (2014); Arikan &
al. (2008); Lim et al. (2009) Stulz (2016); Oxley &Pandher
(2016); Alhadab & Ngu-
yen(2018); Mili et al. (2019)
1. Risk reduction Chevalier (2000); Rajan et al. (2000); Anderson et al. (2011);
2. Mergers and Lamont & Polk (2001);Hadlock et Gatzert & Schmeiser (2011)
Acquisitions al. (2001); ;Marinelli (2011); Ammann
3. Financial syner- Whited (2001); Mansi & Reeb et al. (2012); Rudolph &
gies (2002); Campello (2002) Schwetzler (2014) ; Manrai et
4. Corporate invest- Graham et al. (2002);Denis et al al. (2014); Custodio (2014);
ments (2002) ;Campa & Kedia (2002); Volkov & Smith (2015); Liang
5. Financial costs Ferris et al. (2003) et al. (2016) Kuppuswamy &
6. Stock markets Burch & Nanda (2003); Gomes Villalonga (2016) ; Anjos &
7. Debt capacity & Livdan (2004) ;Carrieri et al. Fracassi (2018) ;Bielstein et al.
and tax shields (2004) ; Villalonga (2004a, 2004b) (2018) ; Cheng & Wu (2018)
Financial
; Stowe & Xing (2006); Laeven &
Perspective
Levine (2007); Hayden et al. (2007);
Rhodes-Kropf & Robinson (2008) ;
Massa & Rehman (2008); Lelyveld
& Knot (2009); Akbulut & Mat-
susaka (2010); Mitton & Vorkink
(2010);Klein & Saidenberg (2010)
;Hoberg & Phillips (2010);Hund et
al. (2010) ; Yan et al. (2010)
; Berger et al. (2010);Glase et al.
(2010); Grass (2010);Elsas et al.
(2010)

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Salvador Hernández Sánchez. Corporate Diversification and Firm Performance: Theoretical Boundaries and
Proposed Research Agenda.

1. nstitutional envi- Claessens et al. (2000); Shaffer and Diestre & Rajagopalan (2011)
ronment Hillman (2000) Khanna & Rivkin ;Braakmann et al. (2011);
2. Public policies (2001); Khanna & Palepu (2000); Chen & Chu (2012) ;Nanker-
3. Country/region Kock & Guillen (2001); Ramirez vis & Singh (2012); Oyewobi
development & Espitia (2002); Lins & Servaes et al. (2013) ; Kang (2013);
4. Institutional (2002); Nachum (2014); Jara- Bertin
voids Kogut et al. (2002); Mayer & Whi- et al. (2015); Akben(2015);
5. Cross-country ttington (2003); Wan & Hoskisson Seifzadeh (2017); Bhatia &
analysis (2003); Laurila & Ropponen (2003); Thakur (2018); Brahmana et
Institutional 6. Legal systems Li & Wong (2003); Szelesset al. al. (2019); Zuñiga-Vicente et
Perspective (2003); Ramaswamy et al. (2004); al. (2019); Setianto (2020)
Fauver et al. (2004); Hoskisson et
al. (2005); Peng et al. (2005) Wan
(2005); Chang et al. (2006); Peng &
Delios (2006); Shackman (2007);
Chakrabarti et al. (2007); Santalo &
Becerra (2008); Delios et al. (2008);
Lee, et al. (2008); Dos Santos et al.
(2008); Singh et al. (2010); David et
al. (2010)
1. Diversification Tanriverdi & Venkatraman (2005) ; Bardolet et al. (2011); Kim et
experiences Bergh & Lim (2008) al. (2011); Chen et al. (2013);
2. Learning and Hutzschenreuter & Guenther (2008) Theodorakopoulos et al.
knowledge Cao & Liu (2010) (2014) ; Mayer et al. (2014)
Organizatio-
transfer ;Villasalero (2014)
nal Learning
3. Organizational Sohl & Vroom (2014) ;
issues Sakhartov & Folta (2014);
Andreou et al.(2016); Ryu et
al. (2020)

Proposed Research Agenda

This study was conducted to provide an exhaustive review of theoretical and
empirical articles that explain the relationship between diversification and
firm performance to identify theoretical gaps that have been overlooked. In
fact, the meta-narrative review approach and thematic analysis have revea-
led two important perspectives: the historical and geopolitical perspectives.

Geopolitical perspective
The concept of Geopolitics was coined by Rudolf Kjellén in 1914 and then
developed by German General Prof. Karl Haushofer during World War.
Classical geopolitical thought is based on the political power to control
and compete for geographical space (Engelbrekt, 2018). In this context
policy makers sometimes encourage firms to diversify into new sectors via
suggestions or global regulatory policies. Thus, diversified firms and states
are constantly interrelated and influencing each other to bargain strategic
positions (Abdelal, 2015; Schneider, 2009).

The geopolitical perspective may evaluate diversification in ter-

ms of global externalities, geopolitical regulatory policies and strategic
geography. In this perspective, natural resources, territory and intergover-
nmental communities may rise as a global externalities influencing diver-
sification and firm performance. It is also argued that the impact of global

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regulatory policies on diversification results, as international government

authorities may impose constraints to certain industries, in case of global
crisis, conflict or sanitary issues. Properties of topography, allocation and
transportation of products, logistic access to ports, sea lanes and cargo
airports may influence the relationship between corporate diversification
and firm performance. Also, the interactions between human society and
ecological environment may shape the decisions to diversify. These argu-
ments suggest factors that have been neglected according to this literature
review, thus, the following research questions are raised:

Does the geopolitical perspective help to explain the diversifica-

tion-performance linkage?

Do the global externalities, geopolitical policies and strategic

geography influence the diversification-performance linkage?

Historical perspective
The history of business view involves complex interactions between indus-
tries, entrepreneurs, socio-political environment and firms in their histo-
rical context. In this perspective, the evolution of firms and historical re-
lations contribute to have a deeper understanding of business phenomena
including strategies and performance (Jong, Higgins & van Driel, 2015).

The historical perspective may view corporate diversification

with regard to historical events, temporal dynamics and historical cultural
traditions. A proper study of the historical context can clarify corpora-
te diversification research in given historical events by finding key advice
documents from the past that offers alternative explanations (Rutterford
& Sotiropoulos, 2016). This perspective includes the study of temporal dy-
namics prompted by innovations and technical revolutions and how they
may shape the different strategies and performance (Perez, 2010). In this
scenario, strategies and firm outcomes may be explained by periodical in-
dustrial-technical revolutions over time. Hence, the relationship between
diversification and performance may be mediated by historical trends and
patterns. In this perspective, diversification may also be related to cultural
and historical traditions (i.e., shared education, symbolic structures and
language) as these may guide firm behavior and results. It is stated that
the relationship between corporate diversification and performance draws
upon a set of commonly shared meanings, discourses and symbolic struc-
tures of culture that are embedded in human physical and mental daily
activities. Therefore, according to these factors, historical understanding
of the context might help to explain diversification and performance, thus,
the next questions are presented:

Does the historical perspective help to explain the diversifica-

tion-performance linkage?

Do the historical events, temporal dynamics and cultural-histo-

rical traditions influence the diversification-performance linkage?

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Salvador Hernández Sánchez. Corporate Diversification and Firm Performance: Theoretical Boundaries and
Proposed Research Agenda.

Summary of perspectives
Based on the narrative literature review approach and thematic analysis of
202 articles, two alternative perspectives to explain corporate diversifica-
tion and performance are proposed, as summarized in the following table.

Table 2.3
roposed theoretical perspectives and subtopics on the diversification research.

Proposed theoretical Subtopics

perspectives
Global externalities
Geopolitical perspective Geopolitical policies
Strategic Geography
Historical events
Historical perspective Temporal dynamic
Cultural-historical traditions

Discussion
This paper reveals six theoretical perspectives, and proposes two alternati-
ve approaches to the study of the relationship between corporate diversifi-
cation and firm performance. Although, the review and research method
allow to develop and tailor the survey process to ensure the appropriate li-
terature is covered, it may not be sufficient to properly classify the themes.
The large body of research, overlap between the themes and theoretical
contradictions may hinder such endeavor. However, this article highlights
the lack of consideration for geopolitical and historical perspectives from
previous literature review studies, theoretical and empirical papers.

This study has different implications for research and practice.

In research, scholars interested in this relationship may use this review
to identify the theoretical boundaries that have been discussed over the
last 20 years. Also, it assistances to develop an integrated framework and
promote further investigations on the subject. In practice, this study may
assist corporate managers to make better diversification decisions for cor-
porate planning and particularly resource allocation among business by
considering the theoretical perspectives here presented. It may also help
them to identify guidelines on important contingencies that may affect
diversified firms.

Conclusion
The relationship between corporate diversification and firm performance
cover a multidisciplinary and broad literature. Overall, research on cor-
porate diversification offers a traditional set of perspectives to explain the
nature of this relationship. The evidence suggests six theoretical perspec-
tives to explain diversification and performance: industrial economics,
resource-based view, organizational learning, institutional perspective,
agency theory and financial perspective. This study suggests an historical

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and a geopolitical approach and their main subtopics as alternative expla-

nations. It is concluded that these perspectives should be part to the study
of corporate diversification and firm performance.

Note
The theoretical and empirical studies analyzed in this review can be pro-
vided upon request.

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Sobre los autores

1 Profesor investigador en la Universidad Nacional Autónoma de México,
México.
ORCID: 0000-0003-1794-3163

Licencia de Creative Common

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