The Effect of Business Diversification on a Firm’s Performance, Depending on Its Dynamic Capabilities and Market Dynamism

Abstract

This study examines the relationships between a firm's business diversification, dynamic capabilities, and performance. In particular, using the lens of population ecological perspectives, the different effects of diversification on a firm's performance are investigated according to levels of market dynamism and the firm’s dynamic capabilities. This study demonstrates that, in a rapidly changing market environment, the curvilinear relationship between diversification and firm performance can become weaker at higher levels of a firm's dynamic capabilities. In addition, this study argues that unrelated diversification can be a more ideal strategic choice in a dynamic market environment through a firm's optimized dynamic capabilities.