Industrial de-diversification and its consequences for productivity

Abstract

Using plant-level Census Bureau data, we show that total factor productivity is inversely related to the degree of diversification: The greater the number of industries in which a parent firm operates, the lower the productivity of its plants (holding constant the number of parent-firm plants). We also show that the extent of American firms' industrial diversification declined significantly during the second half of the 1980s: The mean number of industries in which firms operated declined 14%, and the fraction of single-industry firms increased 54%. Firms that were 'born' during the period were much less diversified than those that 'died', and 'continuing' firms reduced the number of industries in which they operated. This decline in diversification, due in large part to intense takeover activity during the 1980s, contributed to U.S. productivity growth.