Firm-Level Diversification and Response to Volatility in the US Manufacturing Sector, 1974-1998

Namsuk Kim

Policy Specialist, Office of Development Studies, United Nations Development Programme, 336 East 45^th Street, UH-410, New York, NY 10017, USA, Tel: +1-212-906-3681, Fax: +1-212-906-3676 namsuk.kim@undp.org

JEL Classification: E32, L25, L60

Abstract

Do firms adhere to a predetermined list of products, as in the widely used assumption in firm-behavior studies or do they keep a portfolio of products flexible over time? This paper uses the Longitudinal Research Database of the U.S. Bureau of Census from 1974 to 1998 to study the trend and cyclicality of firm/plant level diversification of the manufacturing sector in the United States. Empirical results find that firms use diversification as one of the adjustment margins, using within- and between-plant diversification whenever possible. Firm-level diversification decreases as the uncertainty decreases in the U.S. manufacturing sector.

Keywords:

Diversification, Volatility, Business cycle, Firm-level adjustment

Acknowledgments

This paper was written while the author was a research fellow at the Center for Economic Studies (CES), United States Bureau of Census. It has undergone a more limited review than official Census Bureau publications. All results were reviewed to ensure confidentiality. The author wishes to thank John Haltiwanger, Gordon Phillips, Lucia Foster, Ronald Jarmin, Keun Lee, as well as seminar participants at the CES, University of Maryland, Econometric Society 2005 World Congress, and Korea Research Association on Firm Studies for many helpful discussions. Likewise, the author would like to thank two anonymous referees for their suggestions. All remaining errors are the author’s. The views expressed in this note are those of the author and do not necessarily reflect those of UNDP or US Bureau of Census.

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