Determinants of Diversification by Young, Small Firms

Abstract

Young firm diversification is examined investigating the determinants of the timing of diversification (i.e. how long it takes from start-up to diversification). We use extensive longitudinal data containing information on firms’ characteristics and environmental conditions, and their evolution over time. We find that only a very small proportion of young, small firms diversify in their first years. Firms are more likely to diversify earlier if they are larger and if the minimum efficient scale in their original industry is smaller. Firms with a greater proportion of employees in managerial positions and more qualified human resources are also more likely to diversify early. Firms entering volatile markets are more likely to diversify earlier in their lives.