The impact of within-industry diversification on firm performance

Abstract

PurposeThe purpose of this paper is to investigate how within-industry diversification affects the financial performance of small- and medium-sized enterprises (SMEs) in emerging markets (EMs). The authors draw on both the resource-based view and the institutional perspective and argue that within-industry diversification can enhance the financial performance of SMEs in EMs. Due to institutional voids in emerging economies, SMEs can gain additional benefits from scope economies, as well as from market returns, by filling product market voids and gaps in business ecosystems, while also enjoying low input and labor costs that reduce the coordination costs of diversification. This, in turn, enhances benefits of within-industry diversification, thereby resulting in higher financial profitability.Design/methodology/approachThis study employs panel data econometrics to estimate the model. The authors test hypotheses on 195 firms, originating from five countries in Southeast Asia, during the period of 2009–2014.FindingsThe empirical results support the arguments. Within-industry diversification has a positive impact on the performance of SMEs in EMs. These effects become weaker when the institutional contexts are more developed. Nevertheless, such effects become stronger when SMEs in EMs are more efficient.Research limitations/implicationsThe relationship between within-industry diversification and performance is a positive linear pattern, which differs from the pattern in advanced economies. In addition to unrelated diversification, the related diversification is preferable for firms in EMs.Practical implicationsThe paper provides implications for SMEs that aim to enhance their performance by engaging in single product lines and within-industry diversification.Originality/valueThis paper examines the different ways within-industry diversification can enhance SMEs performance in EM contexts.