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Opportunity costs, industry dynamics, and corporate diversification: Evidence from the cardiovascular medical device industry, 1976–2004

Authors


Correspondence to: Brian Wu, Stephen M. Ross School of Business, University of Michigan, 701 Tappan Street, Ann Arbor, MI 48109–1234, U.S.A. E-mail: wux@umich.edu

Abstract

This paper examines how demand conditions across alternative markets impact diversification decisions and firm performance by influencing the opportunity costs of deploying non-scale free capabilities. Using data within the cardiovascular medical device industry, this study shows that: (1) firms with a larger stock of pre-entry innovation experience are more likely to diversify; (2) firms in a current market with greater relative demand maturity are more likely to diversify; (3) diversification is associated with a performance decrease in the current market; and (4) diversification is associated with a performance increase at the corporate level. These findings shed new light on the self-selection process of corporate scope, the conceptualization of firm capabilities, and the connection between industry dynamics and resource deployment. Copyright © 2013 John Wiley & Sons, Ltd.

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