Evidence from Production Functions

The RBV posits as a necessary condition for diversification that a firm’s resources can be leveraged beyond its original business. To achieve sufficiency we need to know whether the resource is best leveraged inside the firm or through a market contract. We therefore couple the RBV with the Adjustment-cost Theory of the firm to make and test a set of predictions about when firms should extend their scope. The two strong points of the study are (1) Because we are specific about the theory of the firm invoked, we can make more precise predictions, and (2) we test the predictions in production functions as well as in estimates of actual firm scope.