Diversification as an Adaptive Learning Process: An Empirical Study of General-Purpose and Market-Specific Technological Know-How in New Market Entry

An enduring trait of modern corporations is their propensity to diversify into multiple lines of business. Penrosian theories conceptualize diversification as a strategy to exploit a firm’s fungible, yet “untradeable”, resources and point to redeployment of technological know-how as an important driver thereof. However, less understood are the characteristics of technological assets that underlie firms’ diversification decisions, and the impact diversification has on firms’ subsequent development of technologies. In this paper, we expand the existing theories in two ways. First, we argue that central to understanding firms’ diversification decisions is a distinction between their technological assets that are applicable to many markets and ones that are useful in only a limited number of contexts. To this end, we develop a novel way to characterize technologies along a continuum from highly general-purpose to highly market-specific. Second, we explore empirically the idea that diversification is an adaptive learning process involving both exploitation of existing capabilities and creation of novel ones. Using data on three decades of patenting and diversification histories of 28,376 firms, we find that: (1) a firm’s possession of general-purpose technological assets is positively associated with its decision to diversify, and (2) firms that enter a new industry through diversification develop technologies that are specialized to the target industry. Our findings have implications for understanding firm growth, diversification, and evolution.