Product Diversification In Competitive R&D-Intensive Firms: An Empirical Study Of The Computer Software Industry

Abstract

This paper studies the effect of diversification into different product categories within competitive high-tech industries. Empirical results obtained  using the prepackaged computer software industry as the sample show that: (1) diversified firms appear to be more profitable (have higher returns on equity), attain a larger market share, enjoy higher excess market returns, and have a higher market-to-book ratio; (2) from the investors’ perspective, diversification per se does not increase firm value. Realized higher values do not appear to come from more efficient use of assets. Rather, they stem from the higher innovation efficiency (higher sales revenue per employee) and higher levels of R&D spending for firms that have diversified into different product categories than for firms that confine development to a single product category.