Corporate Diversification and Innovation Efficiency : An Empirical Study

Large diversified corporations have been widely criticized as being inefficient innovators with an orientation to maximizing short-term profits. This study investigates this criticism by testing whether the number of new products introduced per Ramp;D dollar is lower among more diversified firms. We find no statistically discernible effect of diversification on innovative efficiency in a sample of 706 research-intensive firms in the 1981-1988 period. This is consistent with the argument that diversified organizations are rationally designed to minimize incentive and communication problems which may hinder their innovative efforts. In support of this argument, we find that diversified firms are more likely to have separate research and development centers which can be administered by managers whose compensation is tailored to maximize innovation