Diversification and Innovation Revisited: An Absorptive Capacity View of Technological Knowledge Creation

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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.

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© 2012 IEEE. Personal use of this material is permitted. Permission from IEEE must be obtained for all other uses, in any current or future media, including reprinting/republishing this material for advertising or promotional purposes, creating new collective works, for resale or redistribution to servers or lists, or reuse of any copyrighted component of this work in other works. DOI: 10.1109/TEM.2011.2165726

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