Build or Buy? Human Capital and Corporate Diversification

Why do some firms enter a new market by acquiring an existing company operating in this market (external entry), while more than 90% of firms do so by building on their existing resources (internal entry)? This paper shows that human capital acquisition is a key motive behind firms' decision to grow externally. We develop a simple production model in which firms use heterogeneous worker teams to execute tasks and we propose a firm-level measure of human capital. We estimate it using a novel data set constructed by merging French employer payrolls with commercial M&A data sets. Human capital acquisition explains firms' chosen mode of entry: firms whose human capital is adequate for the new market favor internal entry, while those whose human capital is not adequate for the new market favor external entry