The dominance of diversified versus specialized firms across industries

Some industries mostly include diversified firms, while specialized firms dominate other industries. This study analyzes what factors affect the dominance of diversified versus specialized firms. In line with transaction cost economics, we show that market concentration and the degree of variability in the diversification pattern of firms in the industry are negatively associated with the overall extent of activities accounted by specialized firms across the 720 industries in our study. We also discuss the implication of these results for the literature on firm diversification.