We investigate the relationship between diversification and risk of firm failure for new ventures. In doing so, we draw upon two streams of research. First, based on related diversification literature we hypothesize that competing in multiple product-markets from inception lowers the risk of firm failure. However we also formulate a competing hypothesis based on the simplicity literature (Lumpkin & Dess, 1995; Miller, 1983). This literature argues that simplicity and focus in the strategy- making process within new ventures is positively linked to performance (Lumpkin & Dess, 1995). We extend this logic to product-market diversification and hypothesize that competing in multiple product-markets from inception increases the risk of firm failure. Lastly, we combine the related diversification and simplicity literatures to hypothesize that firms which diversify after inception have a lower risk of failure than firms which are diversified at inception.
Gras, David and Lumpkin, G. T.
"NEW VENTURE DIVERSIFICATION AND FAILURE IN THE MICROFINANCE INDUSTRY (INTERACTIVE PAPER),"
Frontiers of Entrepreneurship Research: Vol. 32
, Article 19.
Available at: http://digitalknowledge.babson.edu/fer/vol32/iss12/19