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We review the literature on the diversification–performance (D–P) relationship to (a) propose that the time is ripe for a renewed attack on understanding the relationship between diversification and firm performance, and (b) outline a new approach to attacking the question. Our article makes four main contributions. First, through a review of the literature, we establish the inherent complexities in the D–P relationship and the methodological challenges confronted by the literature in reaching its current conclusion of a nonlinear relationship between diversification and performance. Second, we argue that to better guide managers the literature needs to develop along a complementary path—although past research has often focused on answering the big question of does diversification affect firm performance, this second path would focus more on identifying the precise micromechanisms through which diversification adds or subtracts value. Third, we outline a new approach to the investigation of this topic, based on identifying (a) the precise underlying mechanisms through which diversification affects performance, (b) the performance outcomes that are “proximate” to the mechanism that the researcher is studying, and (c) an appropriate research design that can enable a causal claim. Finally, we outline a set of directions for future research.
Both authors contributed equally to this work.
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