Diversification and Performance in Developed and Emerging Market Contexts: A Review of the Literature

The link between diversification and performance has become an important topic for research in diverse fields such as strategic management, industrial organization and financial management. However, a synthesis of the research done in developed and emerging markets is missing. This paper attempts such a synthesis by comparing and contrasting the past cumulative empirical research evidence on the relationship between diversification and firm performance in the context of developed economies to the more recent work in the emerging economies. The empirical literature has been divided into three broad perspectives, and the paper highlights the considerable diversity in its findings in developed and emerging markets across each of these perspectives. Based on this study, it is proposed that related diversification is preferable in developed economies and should be based on specific resources, whereas unrelated diversification is appropriate in emerging economies and should be based on generic resources. Although agency problems exist in both contexts, it is argued that the type of problem differs in developed and emerging markets. The paper concludes by identifying three directions for future research. First, the relationship between diversification and performance should be examined across each industry separately and not in aggregate. Secondly, future research needs to examine the organizational mechanisms required to make diversification successful. Finally, the relationship needs to be examined under unstable and dynamic situations such as the current global economic downturn.