Diversification

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The following article is from The Great Soviet Encyclopedia (1979). It might be outdated or ideologically biased.

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

The Great Soviet Encyclopedia, 3rd Edition (1970-1979). © 2010 The Gale Group, Inc. All rights reserved.
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