This paper studies how diseconomies of scope arise from the knowledge characteristics of industries in which firms operate. When industries are characterized by sticky knowledge — voluminous, fast-changing, and embedded in a local context – we predict that the corporate costs of managing in pairs of industries will rise more sharply. In analysis of industry-level data on manufacturing firms in the United States, we find that the distribution of industries in firms is consistent with this prediction: diversified firms are less likely to operate in two (separately) geographically-concentrated industries. In addition, in longitudinal analysis firms are more likely to exit an industry after an increase in geographic concentration, either in their primary or secondary industry. The results suggest that sticky knowledge shapes the boundaries of firms through misfits that create diseconomies of scope. The findings also suggest that the monitoring role of the corporate office cannot be as neatly separated from its entrepreneurial capabilities as has previously been argued by strategy scholars.
- corporate office,
- multidivision firm,
Available at: http://works.bepress.com/charles_williams/10/