Organizational capital and the choice between specialization and diversification

This paper specifies a model in which the preservation of organizational capital is the principal factor motivating corporate diversification decisions. Alternative hypotheses of the determinants of diversification are then subjected to empirical test with data for 96 US industrial firms in the 1967–71 period. Consistent with the model, variables associated with unfavorable expectations on the marginal returns to investment in existing activities proved dominant in explaining ‘desired’ increases in diversification. Alternative explanations, namely, the role of managerial attributes, of absolute advantages of some firms, and of opportunities created by research and development, had more modest explanatory power.