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Received 28 March 1998
Final revision received 9 August 1999
Key words: diversification; performance; corporate strategy; curvilinearity
While an extensive literature examines the diversification-performance relationship, little agreement exists concerning the nature of this relationship. Both theoretical and empirical disagreements abound. This study synthesizes findings from three decades of research to address major theoretical issues that remain open to debate. We derive three competing models from the literature and empirically assess these using meta-analytic data drawn from 55 previously published studies. The results of our tests indicate that moderate levels of diversification yield higher levels of performance than either limited or extensive diversification. Thus, we provide support for the curvilinear model; that is, performance increases as firms shift from singlebusiness strategies to related diversification, but performance decreases as firms change from related diversification to unrelated diversification. The results also indicate major effects from variation in diversification and performance operationalizations. Copyright (C) 2000 John Wiley & Sons, Ltd.
INTRODUCTION
Perhaps the most researched linkage in the strategic management literature is that involving diversification and performance (Chatterjee and Wernerfelt, 1991), and yet this area of inquiry falls far short of consensus. This observation leads us to conclude that this research domain-while large-has not yet reached maturity. A research stream is best characterized as mature when (1) a substantial number of empirical studies have been conducted, (2) these studies have generated reasonably consistent and interpretable findings, and (3) the research has led to a general consensus concerning the nature of key relationships. The diversification-performance literature fails to satisfy the last two criteria. Inconsistency in findings from more than 30 years of research and the lack of consensus regarding this linkage reveals that "there is still considerable disagreement about precisely how and when diversification can be used to build long-run competitive advantage" (Markides and Williamson, 1994: 149), a conclusion that is shared by many (e.g., Hall and St. John, 1994; Hoskisson and Hitt, 1990; Hoskisson et al., 1993; Seth, 1990). Clearly, this research stream is voluminous, but it is not mature as defined by an empiricallyshaped consensus.
Diversification-performance (DP) research spans a number of business disciplines. First, industrial organization economists considered the relative performance of diversified and undiversified firms (e.g., Arnould, 1969; Gort, 1962; Lang and Stulz,...