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Economics of Industry Paper
Diversification and Synergies: Effects on Profitability
Magda Bianco
March 1997
Paper No' EI 17:
Full Paper (pdf)

Tags: diversification; synergies; profitabiity; firms.

This paper addresses the questions of the effects of diversification strategies on firms' profitability. Empirical analyses do not seem to confirm the hypothesis that diversification is the optimal response to the presence of synergies and hence generates higher profits. It is shown that this might be either the effect of distortions due to the omission of some other factors which affect the efficiency of firms, or the result of selection bias. Diversified firms, in fact, may be the less efficient firms, just able to survive due to the synergies they achieve diversifying.