Relatedness and Market Exit

Researchers in corporate strategy have long argued that resource "relatedness" contributes to a firm’s competitive advantage. One implication is that entries made by a firm into businesses that are closely related to the firm’s existing businesses should have higher survival rates than entries by the firm into unrelated businesses. In contrast to this traditional view, we offer a distinct perspective in which relatedness increases a firm’s likelihood of abandoning new businesses. Using a sample of more than 1,200 market entries in the U.S. telecommunications sector during 1989-2003, we show that the rate of market exit increased with the relatedness of the new business to the firm’s existing businesses