What a firm produces matters: Processes of diversification, coherence and performances of Indian manufacturing firms

Abstract Economic growth and development of a country involves the accumulation of knowledge and dynamic capabilities. Past research has begun to investigate capability accumulation and macro-economic development of countries and sectors, and the role of new products in these processes. In this work, we focus on the firm-level process of capability accumulation and diversification in a developing country, namely, India. First, we explore the drivers of firm diversification strategies, and the effects of diversification upon firm performance in terms of profitability and sales growth. Second, we look at the idiosyncratic characteristics of different products, trying to identify the synergies of a product line with respect to the overall product basket of the firm – i.e. the “coherence” of its diversification patterns. We observe that the future performance of firms crucially depends on the interactions between the products they produce.