Diversification of Chinese Companies: An International Comparison

by Joseph P.H. Fan, Jun Huang, Felix Oberholzer-Gee, Troy D. Smith & Mengxin Zhao

Overview — Many observers have argued that Chinese managers are particularly quick to diversify their enterprises. Fueled by robust economic growth and the scant enforcement of intellectual property rights that could serve as barriers to entry, Chinese companies appear to be aggressively expanding into new industries whenever economic opportunities appear to beckon. There is much anecdotal evidence to support this view. But because the Chinese economy is extraordinarily large and dynamic, it is difficult to know whether anecdotes reflect an underlying trend toward greater diversification. This paper provides systematic evidence about the scope of Chinese companies, and compares the data with the evolution of firm scope in 8 other large economies. Key concepts include:

This research shows no evidence that emerging-market companies are systematically more diversified than their developed-market counterparts.
Contrary to some claims, the level of diversification of Chinese firms has remained stable over the past 5 years.
In all other countries in the research sample, firms have become more focused over time. Chinese companies did not follow this trend.
Chinese state-owned enterprises diversified their operations more aggressively than other Chinese firms.

Author Abstract

Purpose—This paper provides a systematic comparison of the level of business diversification in China and eight other large economies for the 2001 to 2005 period. We investigate reasons why Chinese firms are more diversified than companies elsewhere.
Design/methodology/approach—We collect data on the number of business segments in which publicly traded companies operate from the Thomson One Banker database. We analyze the data using nonparametric tests and regression analysis.
Findings—The mean number of business segments per firm varies significantly by country. Notably, there is no evidence in our sample that emerging-market companies are systematically more diversified than their developed-market counterparts. In most countries, firms have become less diversified over time. However, there is no such trend in China. The level of diversification of Chinese enterprises does not vary over our study period (2001-2005), making Chinese firms the most diversified in our sample by 2005. China's growth rate does not seem to explain the higher level of firm diversification. However, we find that Chinese state-owned enterprises diversify their operations more aggressively than other Chinese firms.
Research limitations/implications—Ownership data and business group affiliations were not available for all firms in our sample, making it difficult to control for these effects across economies.
Practical implications—Government involvement in state-owned enterprises may be contributing to a divergence in the pattern of business diversification between China and other economies.
Originality/value—This paper quantifies anecdotal evidence that Chinese firms are more diversified than similar firms in other countries.