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Diversification and diffusion: A social networks and institutional perspective

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Abstract

We examine the diffusion of a major firm strategy, unrelated diversification, among a population of Chinese listed firms during the 1991 to 2002 period. We propose that a firm’s social network can serve as both an information disseminator and a channel of influence in the diffusion of the diversification decision. Further, we investigate how the institutional environment alters the role of a network over time. We find that firms are more likely to diversify into conglomerates if (1) they occupy a central position in the network; (2) they have higher levels of government shareholding; and (3) the firms with which they have network ties diversify. Moreover, as the institutional environment strengthens over time, the influence of a firm’s network partners decreases. Consistent with these results, we contend that diversification is not only a response to economic and agency concerns, but also a function of the social and institutional context in which a firm is embedded.

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Authors and Affiliations

  1. SKOLKOVO Institute for Emerging Market Studies, Moscow School of Management, Unit 1608, North Star Times Tower, No. 8 Beichendong Road, Chaoyang District, Beijing, 100101, China

    Nan Zhou

  2. Department of Strategy & Policy, National University of Singapore, Singapore, 117592, Singapore

    Andrew Delios

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Correspondence to Nan Zhou.

Additional information

This research was supported by an NUS Academic Research Grant (R-313-000-052-112). We thank Editor Eric Gedajlovic and two anonymous reviewers for their comments. We also thank participants from the Island Wide Seminar Series in Singapore, as run by INSEAD, NUS, NTU, and SMU and Kwanghui Lim, Soh Pek Hooi, and Fu Qiang for comments and advice on previous versions of this manuscript.

Appendix 1: Rumelt’s diversification categories

Appendix 1: Rumelt’s diversification categories

Rumelt (1974) used three measurements to classify a firm into a diversification category: the Specialization Ratio (SR), the Related Ratio (RR), and the Vertical Ratio (VR). A firm can be classified into a different diversification group based on the above measures.

Specialization ratio (SR)

The Specialization Ratio is defined as the proportion of a firm’s revenues that can be attributed to its largest single business in a given year. Following Wrigley, Rumelt defines a specialization ratio of 0.70 as the dividing line between the Dominant, and the Related, and Unrelated groups (Wrigley, 1970).

Related ratio (RR)

The Related Ratio is defined as the proportion of a firm’s revenues attributable to its largest group of related businesses. Rumelt set the dividing line between Related and Un-related firms to be a related ratio of 0.70. Actually the 70% cut-off was chosen by Wrigley because “it seemed to match fairly well with the judgments expressed by informed observers” (Wrigley, 1970).

Vertical ratio (VR)

The Vertical Ratio (VR) in any given year is defined as the proportion of the firm’s revenues that arise from all by-products, intermediate products, and end products of a vertically integrated sequence of processing activities (Rumelt, 1974).

Diversification categories

Four major categories of diversification strategy—Single Business, Related Business, Dominant Business, and Unrelated Business—are defined by Remult. All but the Single Business category has been further divided into sub-categories. The heuristic used for assigning a firm to a category is indicated in the flow diagram outlined in the following figure:

figure a

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Zhou, N., Delios, A. Diversification and diffusion: A social networks and institutional perspective. Asia Pac J Manag 29, 773–798 (2012). https://doi.org/10.1007/s10490-010-9242-4

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