Technological Diversification, its Relation to Product Diversification and the Organisation of the Firm

This working paper is produced for discussion purposes only. The papers are expected to be published in due course, in revised form and should not be quoted without the author's permission. Assessing the context, nature, and extent of MNEs' Backward knowledge transfer to Chinese suppliers 2004.07 Richard Fairchild The effect of product differentiation on strategic financing decisions. Introduction This paper studies the issue of technological diversification at the firm level through the theoretical foci of evolutionary economics and resource-based theory. Despite empirical observations of our increasingly technologically complex world, technological diversification is little studied. Traditional researches into diversification and the firm have tended to focus on diversification at the levels of products and regions for the motives of risk diversification and the exploitation of economies of scale and scope. Technological diversification has generally been subsumed into such discussions and has implicitly been assumed to follow diversification at the product level. However, more recent work on large firms examining technological scale and scope, and the relationship between the breadth of the product base relative to the firm's technological base, has stimulated the need to look at technological diversification in its own right. As such, I examine the nature of technological diversification and outline the ways in which this, as a process, may relate to diversification at the product level. In turn, these relationships help to explain how new technologies may be absorbed via different organisational forms and hence why technological diversification is a phenomenon that has important implications for the organisation of competencies within firms and between firms. Background This paper considers technological diversification and its implications for the firm. Neo-classicists traditionally study the behaviour of firms with respect to input factors of production; the quantity of goods produced and the price at which they should be sold in order to maximise profit. The consideration of these decisions is subject to any number of limiting assumptions, many of which are highly remote from reality. In the 4 neoclassical perspective, it is merely the combination and recombination of land, capital and labour ratios that determines what to produce, how to produce it, and in what quantities to maximise profits at the margin. There is no suggestion that how these factors relate to one another might be important in the production process or for the growth of the firm. Nelson and Winter's " An Evolutionary Theory of Economic Change " (1982) arose from …