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Technological Diversification, Coherence, and Performance of Firms

Authors


Address correspondence to: Bart Leten, Faculty of Economics and Applied Economics & Research Division INCENTIM, K.U. Leuven, Naamsestraat 69, B-3000 Leuven, Belgium. E-mail: Bart.Leten@econ.kuleuven.be.

Abstract

Technological diversification at the firm level (i.e., the expansion of a firm's technology base into a wide range of technology fields) is found to be a prevailing phenomenon in all three major industrialized regions,—the United States, Europe, and Japan—prompting the term multitechnology corporation. Whereas previous studies have provided insights into the composition of technology portfolios of multitechnology firms, little is known about the relationship between technological diversification and firms' technological performance. Against a backdrop of the technology and innovation management literature, the present article investigates the relationship between technological diversification and technological performance, taking into account the moderating role of technological coherence in firms' technology portfolios. Hereby, technological coherence is defined as the degree to which technologies in a technology portfolio are technologically related. To measure the technological coherence of portfolios, a measure of technological relatedness of technology fields is constructed based on patent citation patterns found in 450,000 European Patent Office (EPO) patent grants. Two hypotheses are presented here: (1) Technological diversification has an inverted U-shaped relationship with technological performance; and (2) technological coherence moderates the relationship between technological diversification and technological performance positively. These hypotheses are tested empirically using a panel data set (1995–2003) on patent portfolios pertaining to 184 U.S., European, and Japanese firms. The firms selected are the largest research and development (R&D) actors in five industries: pharmaceuticals and biotechnology; chemicals; engineering and general machinery; information technology (IT) hardware (i.e., computers and communication equipment); and electronics and electrical machinery. Empirical results, obtained by fixed-effects negative binomial regressions, support both hypotheses in the present article. Technological diversification has an inverted U-shaped relationship with technological performance. Technological diversification offers opportunities for cross-fertilization and technology fusion, but high levels of diversification may yield few marginal benefits as firms risk lacking sufficient levels of scale to benefit from wide-ranging technological diversification, and firms may encounter high levels of coordination and integration costs. Further, the results show that the net benefits of technological diversification are higher in technologically coherent technology portfolios. If firms build up a technologically coherent diversified portfolio, the presence of sufficient levels of scale is ensured and coordination costs are limited. At the same time, technologically coherent diversification puts firms in a better position to benefit form cross-fertilization between technologies. The present article clearly identifies the important role of technological coherence in technology diversification strategies of firms.

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