Tapping into the potential of diversification to enhance firm performance: the role of information technology

Abstract

Prior research has reported mixed findings regarding the relationship between diversification and firm performance, because a diversification strategy produces not only synergies but also anti-synergies. We argue that information technology (IT) can help unlock the potential of diversification to enhance firm performance by maximising its synergistic effect while minimising its anti-synergistic effect. Using a sample of publicly listed Chinese firms on the Shanghai or Shenzhen Stock Exchange, we find that IT investment positively moderates the relationship between diversification and firm performance. Investing in IT contributes to greater coordination, control, information exchange, and cross-business knowledge sharing, which can enhance the synergistic effect of diversification and mitigate its anti-synergistic effect. Furthermore, we find that the moderating effect of IT investment on the relationship between diversification and firm performance is stronger for related diversification than unrelated diversification, indicating a greater need for IT when undertaking related (vs unrelated) diversification. These findings contribute to a more comprehensive understanding of the relationship between diversification and firm performance. Moreover, we advance research by showing that the moderating effect of IT on the relationship between diversification and firm performance varies according to diversification strategy.

Keywords

• Diversification strategy
• related diversification
• unrelated diversification
• firm performance
• IT investment
• Business, Management and Accounting