Reexamining the Relationship between Firm Diversification and Firm Performance: Two Facets of Diversification and the Dunbar Number of Diversification

Project: Research

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The relationship between diversification and firm performance stands central in strategic management scholarship. In the diversification literature, studies examine potential synergy from a firm's ternal resources and behaviors, to which we refer as the internal facet of firm diversification. In a parallel vein, multimarket competition research investigates how external rivals across diverse markets—coined here as the external facet of firm diversification—may influence firm performance. These two research streams remain largely separated, albeit their common theorization target. Such intellectual disjunction hinders the development of unbiased knowledge on the performances of diversified firms. For example, omitted variable biases have plagued empirical analysis in both the internal-focused diversification studies and the external-oriented  multimarket competition investigations. In this research proposal, we develop two studies that build towards a unified theory of diversified firm performance. In Study One, we cross-pollinate firm diversification and multimarket competition research. On the theoretical front, we conceptualize both internal and external diversification facets as firm performance antecedents. On the empirical front, we identify three critical issues of prior studies in addition to omitted variable bias: observation dependency, intertemporal correlation of firm performance, and endogenous process of multimarket contact. Due to these issues, empirical findings remain contended in the literature, and the conflicting interpretations have thwarted theoretical understanding and practical insights about the performances of diversified firms. To address such deficiencies, we use the spatial econometric model developed by Qu and colleagues (2015; 2017; 2016) to investigate how internal and external diversification facets influence the performances of general insurance firms in China. In Study Two, we conceptualize the organizational Dunbar number. First developed by Robin Dunbar (1992), the individual Dunbar number is the maximum size of an average person's friendship (acquaintance) network, which is determined by individual cognitive capacity for social network maintenance. Per Dunbar’s research, such a number for the average person is about 150. Like individuals, organizations are embedded in relational networks and subject to managerial cognitive limitations. Hence, we ask a fundamental research question: For an organization, is there a Dunbar's number? To answer this question, we define three size-weighted forms of organizational Dunbar’s number—the maximum form, the intended form, and the realized form. We develop a novel method to empirically identify the realized form of organizational Dunbar's number in the general insurance industry in China. 


Project number9043067
Grant typeGRF
Effective start/end date1/01/21 → …