Do companies which try to do new things succeed and why? Samuel Phineas Upham dicusses a seminal work on the topic
In Diversification, Ricardian rents, and Tobin’s q, Cynthia A. Montgomery and Birger Wernerfelt present a study on the ability of a multimarket firm to diversify its resources (factors). Montgomery and Wernerfelt test whether a multimarket firm’s average rents decrease the further a field they transfer resources from their core business. The results of this study have an important affect for the logic of a multimarket firm which is trying to maximize profits.Further, the essay speaks eloquently to the effect of factor specificity on firm profit. The more specified the factor assets, the less valuable alternate use derived from then but the higher their rents, the less specified and the more valuable the alternate use but also the lower comparable rents in their original use.
http://www.groundreport.com/Business/Stick-With-What-You-Know_1/2940253
Samuel Phineas Upham has a PhD in Applied Economics from the Wharton School (University of Pennsylvania). Samuel is a Term Member of the Council on Foreign Relations. He can be reached at his website, PhineasUpham.com.