Patterns of Corporate Diversification in Canada: An Empirical Analysis
Baldwin, John R.
Using a comprehensive micro-database of Canadian firms in conjunction with industry-level data on commodity flows, we develop a profile of corporate diversification within the Canadian economy. Our analysis has two major objectives. First, we decompose corporate diversification into horizontal and vertical components based on the degree to which industries are linked by inter-industry trade flows. Horizontal and vertical decompositions serve as useful proxies for the strategic factors that underlie diversification strategies. We find that over 80% of corporate diversification is horizontal in nature, occurring across industries that do not exhibit strong buyer/seller relationships. In the main, this suggests that many firms pursue diversification strategies in order to spread risk and to take advantage of special assets, more so than as a means of improving vertical efficiencies. Seventy-one percent of corporate diversification is also broad-spectrum, representing an expansion of corporate activities across (as opposed to within) 2-digit industry groups. Our second objective is to ascertain whether diversification patterns are closely associated with certain industry characteristics. Here we consider industry-level factors that are generally posited to affect the level of diversification (e.g., growth, concentration, knowledge-intensity) along with other variables designed to evaluate whether diversified ownership structures are associated with inter-industry commodity flows. Our regression analysis draws on three empirical measures of diversification: first, the amount of total entropy (i.e., diversification) within an industry; second, the average entropy per firm; and last, the percentage of firms within an industry that diversify. Within our sample of 132 commercial industries, total diversification is positively associated with the intensity of inter-industry trade flows. Hence, the more diversified an industry's buyer/seller linkages with other sector
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