Effect of product market diversification on firm performance

Abstract

In this paper an attempt is made to test the hypothesis that diversification leads to an improvement in firm performance. A sample of 524 Indian private sector manufacturing firms is analysed for the post-liberalisation period from 1992 to 1995. The measure of performance is the excess profitability of the firm as compared to the industry average or benchmark profitability. Using the threshold regression model, it is seen that the directions of diversification leading to improved performance depends largely on how efficiently the assets are utilised in the present operations. If the asset utilisation was around the industry average then related diversification improves the overall performance. However, when the firm is not able to best utilise the assets in present operations, performance was significantly improved with diversification into unrelated industries.