The relationship between innovation and product diversification in firms has been studied and debated for decades. Early articles proposed a positive relationship, while subsequent research supported a negative influence on innovation from product diversification based on observable reductions in research & development expenditures. Such findings also suggest a negative influence on absorptive capacity from increasing product diversification. This article uses an absorptive capacity perspective to revisit the relationship. Together with related literature on knowledge creation and transfer processes, a positive association between related product diversification by firms and the quantity of created technological knowledge is suggested. Evidence to support such a positive relationship is provided using patent data from technology-based firms in a sample of 1,997 firm-years between 1990 and 1999. Some evidence of a negative association between knowledge creation and very high levels of unrelated diversification is indicated, qualifying and supporting the "M-form" hypothesis. The findings more closely align understandings of the relationship between product diversification and innovation with the relationship between product diversification and firm performance.
Sugheir, Jeff; Phan, Phillip H.; and Hasan, Iftekhar. (2012). "Diversification and Innovation Revisited: An Absorptive Capacity View of Technological Knowledge Creation". IEEE Transactions on Engineering Management, 59(4), 530-539. http://dx.doi.org/10.1109/TEM.2011.2165726