Learning by doing and corporate diversification

Research Summary: We examine how learning-by-doing (LBD) rates in manufacturing, the extent to which performance depends on own production experience, are associated with firms' diversification decisions. We argue that the LBD rates of industries affect the characteristics of not only the first-order knowledge that firms generate via operating a particular process but also the second-order knowledge that firms develop about the learning process itself. We maintain that first-order knowledge generated via LBD has low transferability; accordingly, firms are less likely to diversify as their industries exhibit higher rates of LBD. We also argue that second-order knowledge about LBD affects the locus of diversification; specifically, firms are more likely to choose target industries with similar LBD rates. Hypotheses are tested using data from over 350 U.S. manufacturing industries. Managerial Summary: We investigate how manufacturing firms' diversification decisions differ depending on the LBD rates of their industries. LBD rates reflect the extent to which production performance depends on own production experience. Consistent with our argument that production knowledge generated from LBD is difficult to transfer to new contexts, results indicate that firms in high-LBD industries are less likely to diversify than those in low-LBD industries. We also argue, however, that firms in high-LBD industries can develop general know-how to accelerate LBD and that this know-how is applicable in other high-LBD manufacturing contexts. Therefore, they prefer to enter other high-LBD industries to leverage that know-how. Our results show that firms are more likely to choose diversification into industries with similar LBD rates.