Innovation diversity, product diversity and innovation performance

Abstract

Innovation diversity has the potential to enhance a firm's technological capabilities and output by facilitating the sharing of know-how across teams. However, the diversification of corporate business segments can lead to management deterioration due to agency problems, ultimately resulting in damage to firm performance and innovation output. Therefore, this paper investigates the impact of diversified innovation and multi-segment firms on innovation outcomes.

We show that when a firm with multiple business segments exhibits a higher degree of innovation diversification, the positive impact of the internal knowledge spillover can mitigate resource inefficiency, resulting in higher levels of innovation performance. To address potential endogeneity concerns, we employ a quasi-natural experiment suggested by Seru (2014), and make a comparison between completed mergers and withdrawn mergers in order to examine the effects of merger-driven diversification on innovation performance. We further conduct three conditional tests, including institutional ownership, trade secrets legal protection and financial constraint. We find that the positive impact of innovation diversity and diversity of business segments on innovation performance will be more significant when firms have better corporate governance, face weaker trade secret legal protection and when firms are financially unconstrained.