Dynamic Technological Diversification and Its Impact on Firms' Performance: An Empirical Analysis of Korean IT Firms

Abstract

This paper aims to analyze the influence of the technological diversification on a firm's innovation capabilities and investigates the effect of various strategies on the firm's financial performance in a technology-oriented environment. We employ the entropy measurement to calculate technological diversification with 2095 patents, which are applied from years 2009 to 2011 by 507 firms that have participated in Korean government Information Technology (IT) Research and Development (R&D) supporting programs. In our framework, a firm should not diversify among the related technology fields, but should concentrate on a specific technology to reinforce the competitive advantage. However, in the case of the firms with sufficient resources, increasing technological diversification among the unrelated technology fields plays a key role on the firms' performance. Furthermore, the degree of the technological diversification should be adjusted dynamically in compliance with the change of a firm's innovation capabilities. Therefore, these results suggest that a firm should develop differentiated competitiveness through specialization by prioritizing its capabilities, and then exploit unrelated technological diversification to search for new opportunities.