Diversification


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Diversification

 

one of the forms of capital concentration.

In diversifying their production, firms penetrate into sectors and fields that are new for them; they enlarge their range of goods and gradually transform themselves into multisector complexes. Diversification is based on the attempt of capitalist firms to maintain their business under conditions of uneven economic development, with rapid growth of some sectors and decline or stagnation of others. The process of diversification has developed particularly since the mid-1950’s. Diversification has grown in industry, transport, construction, and the financial field in the USA, Western Europe, and Japan.

The nature of diversification is determined by the socioeconomic traits of the given country. Nevertheless, there are certain general factors (pertaining to all countries) that affect its development: the scientific-technological revolution, the struggle for high profits, the need to seek out new spheres for the application of profits, the militarization of the economy, the competitive struggle, and the fear of lagging behind in technical progress. As a result of diversification, firms and especially the monopolies have acquired a multisector character; they penetrate first of all into new, highly profitable fields with high growth rates, such as electronics and chemistry. It is advantageous for companies to take the path of combined production, that is, to produce various goods from one and the same basic raw material. This type of production lowers the expenses of the companies, especially those for research; also, research frequently leads to inventions that are remote from the firm’s specialization.

The flow of capital from less profitable sectors into more profitable ones takes place by means of diversification, thus bypassing the traditional capital market. The function of founding new enterprises is gradually shifting to firms which, by diversifying their production, attempt to insure themselves against possible failures and bankruptcies, although such attempts often fail. The process of diversification is speeded up by the merger of separate, formerly independent companies; in the USA the number of such mergers in 1968 was 2,268, more than eight times their average number for the period 1950-54. The majority of these mergers were of a conglomerate character. American concerns have entered the fields of services, construction, real estate, and publishing. They also participate in developing instructional systems, buying and selling information, and leasing out equipment. With an eye to receiving government contacts, they plan slum clearances, design cities, install air and water purifying systems in populated areas, and so on. Under the influence of diversification the structure of firms is changing: from specialized companies they are being transformed into multisector complexes. Thus, steel firms are producing other metals and materials in addition to steel, and the former manufacturers of tin cans are producing containers made of various materials. Some firms have set themselves the task of introducing new technology, engaging in research, and utilizing inventions.

As the result of the merger of a large number of companies in the USA, major firms have been formed: conglomerates consisting of enterprises that do not have any sort of functional ties among themselves. Their rise is connected with various types of speculations, shady transactions, and machinations, in which many banks and mutual funds have taken part. The crisis that developed in 1969 affected the conglomerates, compelling them to sell off a part of their assets.

N. I. MNOGOLET

References in periodicals archive ?
First, the Finger-Kreinin index (FKI) of export diversification compares the structure of exports across countries.
For example, a country may move toward more dispersion according to HHI while at the same time moving toward less diversification according to FKI if other countries are diversifying their exports at a more rapid pace than the country in question.
Keywords: Corporate diversification, product based diversification, entropy measure, hierarchical regression
Studies on corporate diversification have long been the mainstay of strategic management research.
where GM is the Gibbs-Martin diversification index and fi is the area of land use type i; if there is only one land use type then GM is zero while GM becomes one when the land uses are distributed evenly in each type.
Resource-based theory (Penrose, 1959) and market power theory (Edwards, 1955) confirm positive impact and agency theory (Jensen and Meckling, 1976) and free cash flow theory (Jensen, 1986) state negative impact of diversification on firm's financial performance.
Diversification implies a firm moving into a number of markets (sectors, industries or segment) it was not previously engaged in.
The report, which uses a tracker to look at the levels of diversification across the GCC and how to speed up progress, was launched at the Economist event, 'Future of Work: Middle East'.
There are two kinds of diversification at farm level: horizontal diversification and vertical diversification.
They should consider the effect of re-enrollment on diversification and return potential as well as risk levels.
This is because matrices are used by MNCs to implement high corporate integration, by fostering the management of interdependence; while simultaneously implement high area diversification, by advancing the expansion into differentiated areas worldwide.

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