the Existence and Nature of Multi-business Firms: Double Specialization and Neighboring Businesses
Abstract: We propose a theory of the scope of the firm and offer supporting evidence. The theory suggests that multi-business firms exist because they allow better deployment of factors that, because of sub-additive bargaining costs, cannot be traded in fractions or rented for short periods. It predicts that the businesses making up multi-business firms are “neighbors” in two senses: their service needs are correlated and factors specialized to one business are also productive in the other. We then look at a sample of acquisitions and document three regularities. First, input intensities of targets change to more closely resemble those of their acquirers. Second, the performance of targets does not catch up to that of their acquirers. Third, acquirers tend to select targets in industries that are similar to their own.