[Research Seminar 2019.10.30] Learning by Doing and Corporate Diversification

Abstract

We examine how learning-by-doing rates in manufacturing affect firms’ decisions upon diversification. Prior research based on Penrose’s (1959) perspective has tended to hold a view that learning-by-doing fosters diversification by resulting in redundant resources that firms can use to diversify. However, we argue and show that firms from industries featured by high learning-by-doing rates are rather less likely to make diversifying entries because resources generated via learning by doing tend to be context-specific and deeply embedded within processes and thus are difficult to be shared or redeployed. We also claim that this negative effect of learning by doing on the likelihood of diversification is dampened by firms’ second-order capability to manage learning by doing that can be developed through repetitive entries into high learning-by-doing industries. Our results also show that such second-order capability affects the directionality of diversification as well.