The sustainabilityof newly diversified fully-owned subsidiaries: Production efficiency and strategic diversifications

Abstract

A diversification strategy is highlightedas a strategicshortcut to penetrate into new business fieldswhileit is a usefulway toconstructbusiness portfoliosas well. From the perspective of parents, autonomy that is given to newly diversified subsidiariestrades off with their governance onfully-ownedsubsidiaries. Parents become to make strategicdecisionsbased on input-output efficiency when it comes to the longevity of newly diversified subsidiaries. In the paper, we investigate how the longevity of newly diversified subsidiaries are determined taking internaltechnology shocks and exogenously givenmarket shocksinto consideration. For this purpose, a game-theoretic investment game is constructed, which predicts thatparents are generically inclined to liquidatetheir subsidiaries in newly diversified business fields in the long-run. In particular, between the market shocks and the technology shocks, the formers are more likely to affect the sustainability of subsidiaries. Our simulation work supports the theoretic predictions of the game modelexactly; when other conditions are equal, the market shocks can expand parents’total net profits compared to the technology shocks. This outcome can explain why subsidiary termination frequently occursin highly competitive technologicalareas characterized by volatile market environments.