Towards a reconciliation of the diversification-performance paradox: an examination of strategies across the spectrum of diversified corporation

Most empirical research examining the value of diversification explores the linkage between economic performance and the level of diversification at the corporate level of analysis. However, without comparing the returns to diversification to business units operating within a corporation's governance system to the returns of stand-alone businesses or to other business units embedded in other diversified corporations, the analysis can not directly address a fundamental question underpinning the research on diversification, "Do corporations make businesses better off?" Furthermore, few studies, investigating the relationship between diversification and performance, have controlled for variables that have demonstrated effects on business unit performance. To address these criticisms, this study focuses on the business unit level of analysis and employs a general linear mixed model to investigate the linkage between the level of diversification on business unit performance (fixed effects) while controlling for industry, corporate, and business unit factors (random effects). Results show that the relationship between business unit performance and the level of corporate diversification, m which the business unit is embedded, is an inverted U-shaped relationship. Additionally, business unit performance, for most levels of diversification, was significantly different from that of stand-alone firms, suggesting that diversification strategies may add value to businesses over that which a business may achieve without corporate parentage. Business units, within low to moderately diversified corporations, earned a 60% greater return, on average, than that of single stand-alone firms. However, differences in performance of business units embedded in diversified corporations, from dominate through highly diversified corporations, were non-significant.