Diversification by young, small firms: the role of pre-entry resources and entry mistakes

We investigate the determinants of young, small firm diversification by using longitudinal linked employer-employee data. We focus particularly on the role played by the sharing of managerial and qualified human resources, as well as market uncertainty and entry mistakes. We find that a small but significant proportion of young, small firms diversify in their first years. Firms with a greater proportion of managers and qualified human resources are more likely to diversify early, lending credence to the resource-based view of diversification. Firms entering volatile markets are more likely to diversify earlier as well, suggesting that entry mistakes and escape from uncertain, Schumpeterian environments also influence diversification. The inspection of survival patterns of diversified firms sheds further light on the importance of these two determinants of diversification.