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Skill relatedness and firm diversification

Authors

  • Dr. Frank Neffke,

    Corresponding author
    • Center for International Development, Harvard Kennedy School, Harvard University, Cambridge, Massachusetts, U.S.A., Erasmus School of Economics, Erasmus University Rotterdam, Rotterdam, the Netherlands, and Erasmus Studio, Erasmus University Rotterdam, Rotterdam, the Netherlands
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  • Martin Henning

    1. Department of Human Geography, Lund University, Lund, Sweden, and School of Business, Economics and Law, University of Gothenburg, Gothenburg, Sweden
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Dr. Frank Neffke, Center for International Development, Harvard Kennedy School, Harvard University, 79 John F. Kennedy Street, Box 34, Cambridge, MA 02 138, U.S.A. E-mail: frank_neffke@hks.harvard.edu

Abstract

Because of the importance of human capital, a firm's choice of diversification targets will depend on whether these targets offer opportunities for leveraging existing human resources. We propose to quantify the similarity of different industries' human capital or skill requirements, that is, the industries' skill relatedness, by using information on cross-industry labor flows. Labor flows among industries can be used to identify skill relatedness, because individuals changing jobs will likely remain in industries that value the skills associated with their previous work. Estimates show that firms are far more likely to diversify into industries that have ties to the firms' core activities in terms of our skill-relatedness measure than into industries without such ties or into industries that are linked by value chain linkages or by classification-based relatedness. Copyright © 2012 John Wiley & Sons, Ltd.

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