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dc.contributor.authorKlein, Peter G.eng
dc.date.issued2007-07eng
dc.description.abstractWhich type of firm is more innovative: the decentralized, diversified corporation or the smaller, more narrowly focused “entrepreneurial” firm? According to one argument, diversified corporations can do more R&D because their operating units have access to an internal capital market. Other writers argue that decentralized, diversified firms over-rely on financial accounting criteria to evaluate the performance of their operating units, discouraging divisional managers from investing in projects like R&D with long-term, uncertain payoffs. This paper uses a comprehensive sample of diversified and nondiversified firms from 1980 to 1999 to study the relationship between diversification and innovation. I find a robust negative correlation between diversification and R&D intensity, even when controlling for firm scale, cash flow, and investment opportunities. Industry-adjusted R&D—the difference between the R&D intensity of a diversified firm and the R&D intensity it would most likely have if its divisions were standalone firms—is negative, consistent with the hypothesis that diversification reduces innovation by discouraging R&D investment. However, other evidence suggests that internal-capital-market inefficiencies, rather than managerial myopia, are driving the negative relationship between diversification and innovation.eng
dc.identifier.urihttp://hdl.handle.net/10355/8913eng
dc.relation.ispartofContracting and Organizations Research Institute publications (MU)eng
dc.relation.ispartofcommunityUniversity of Missouri-Columbia. Contracting and Organizations Research Instituteeng
dc.source.harvestedPeter G. Klein's web pageeng
dc.subject.lcshDiversification in industry -- United Stateseng
dc.subject.lcshResearch and development projectseng
dc.subject.lcshOrganizational changeeng
dc.titleAre Internal Capital Markets Good for Innovation?eng
dc.typeWorking Papereng


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