the diversification of production
BOYAN JOVANOVIC
New YorkUniversity
The Diversification of Production produce more than one product. In this sense their production is diversified, or horizontally integrated. This paper addresses two questions. First, why have firms become more diversified over the past century? And second, why are diversified firms more oriented toward research and development (R&D) than nondiversified firms? I tackle these two questions under the assumption that a firm diversifies to maximize its efficiency. Economists have often argued that a firm reaps efficiency gains when it diversifies its production because its managerial and R&D inputs can be shared among its various activities:
MOST FIRMS TODAY
The spherein which diversificationis most likely to produceeconomies of scale is researchand develoment. Althoughthe informationthus far gatheredon this question is inconclusive, it is reasonableto say that a for firmwith a wide rangeof productshas manyopportunities exploiting the results of a programof research. This is because the directions in which researchwill produceresults are to a large extent unpredictable. the the
Consequently, greater rangeof activities,the higherarethe chances that a discovery or development in technology will fit into the firms' existing product structure.In this sense, economies are related not so much to size in terms of outputor investmentas to the range of goods
I thankthe C. V. StarrCenterfor Applied Economicsat New York Universityfor and technical financial
Baily, MichaelGort,Yaw Nyarko,Steve Olley, Peter help;Martin for
Reiss, Mike Scherer,CliffordWinston,andthe discussants usefulcomments,andRay
Atje andChungYi Tse for help with the research.Two earlierversionsof this workwere in grouporganizedby RicardoCaballeroand Andy presented an economic fluctuations improvement. Caplin,andthis exerciseled to considerable
197
198
Brookings Papers: Microeconomics 1993
and services produced.If the level of
New YorkUniversity
The Diversification of Production produce more than one product. In this sense their production is diversified, or horizontally integrated. This paper addresses two questions. First, why have firms become more diversified over the past century? And second, why are diversified firms more oriented toward research and development (R&D) than nondiversified firms? I tackle these two questions under the assumption that a firm diversifies to maximize its efficiency. Economists have often argued that a firm reaps efficiency gains when it diversifies its production because its managerial and R&D inputs can be shared among its various activities:
MOST FIRMS TODAY
The spherein which diversificationis most likely to produceeconomies of scale is researchand develoment. Althoughthe informationthus far gatheredon this question is inconclusive, it is reasonableto say that a for firmwith a wide rangeof productshas manyopportunities exploiting the results of a programof research. This is because the directions in which researchwill produceresults are to a large extent unpredictable. the the
Consequently, greater rangeof activities,the higherarethe chances that a discovery or development in technology will fit into the firms' existing product structure.In this sense, economies are related not so much to size in terms of outputor investmentas to the range of goods
I thankthe C. V. StarrCenterfor Applied Economicsat New York Universityfor and technical financial
Baily, MichaelGort,Yaw Nyarko,Steve Olley, Peter help;Martin for
Reiss, Mike Scherer,CliffordWinston,andthe discussants usefulcomments,andRay
Atje andChungYi Tse for help with the research.Two earlierversionsof this workwere in grouporganizedby RicardoCaballeroand Andy presented an economic fluctuations improvement. Caplin,andthis exerciseled to considerable
197
198
Brookings Papers: Microeconomics 1993
and services produced.If the level of