Impact of macro-economic environment on diversification-performance relationship: A cross country study of India and Japan

Integrating the impact of resources and institutional factors, this study compares and contrasts the dynamic relationships between product diversification, business group affiliation and firm performance in two major economies in Asia. India and Japan have been chosen as they represent different macroeconomic conditions in which firms operate. Research following Rumelt (1974) implicitly assumed that the diversification-performance relationship is consistent, regardless of the macro-economic context. This study questions this assumption by examining the relationship among firms operating in two different macroeconomic environments. Further, studies linking diversification with firm performance have been carried out mainly in relatively stable environments. This study examines the impact of diversification on firm performance in contrasting macroeconomic conditions in India and Japan during periods of scarcity. The study also examines the moderating influence of group affiliation on the diversification-performance relationship during conditions of scarcity. The study finds that while the impact of diversification on performance changes from positive to negative when the macro environment changes from munificent to scarce, the moderating influence of business group affiliation remains constant, irrespective of the macro-environment.