Diversification Strategy Of Listed Companies In China And Its Dominant Variable

The enterprise's adoption of the diversification strategy has several motives. First is for the economies of scope or synergy effect. Second is for the stable profit earning. Early studies on the diversification strategy put a stress on the decrease of earnings variability, by practicing the diversification strategy. Third is for using the internal resources of the enterprise efficiently. Diversification management can fully apply both visible and invisible resources of the enterprise by utilizing the potential capacities of employees effectively, extending the technologies, getting brand effect, and sharing the distributing channel. Fourth is for raising cash flow rapidly. And in practice, the key motive of supporting the diversification strategy is that the diversification strategy can enable the enterprise to increase its power in the market, sustain its development, and decrease its risks on the basis of its existing core competence. On the contrary, many enterprises in Europe and the U.S. have reduced their business scales and returned to their core business since the late 1980's, because the diversification strategy brought on enormous bureaucratic costs that affected their profit earnings. The manager in the headquarters finds difficulty in maintaining profit balance between stockholders and himself. Besides, stockholders can decrease the risks which single stock involves and make portfolio with low cost compared with other companies by holding diversified stocks. Hence the use of resources possesses no production capacity and conflicts with the stockholders' expectation, i.e. the maximization of their profits. Chinese enterprises, however, have pursued the diversification strategy since 1990's, going against the main stream. The issue of this study is why the Chinese enterprises prefer the diversification strategy. Since China has a narrow market experience compared with the western countries, its many strategies cannot be explained with the common theory of the enterprise. It is possible that the diversification strategy in China is either a fashion in a sense or the result caused by the low barrier among industries. The purpose of this study is to examine the correlation between the diversification strategies of the Chinese enterprises and their main variables, on the basis of common theory of diversification strategy and principal-agent theory. In addition to the growth of the enterprise and market force, the concentration degree of stock equity and the intricate correlation among manager-main stockholders, and the supervisory institutions influence the diversification strategy.This study selected 200 quoted companies transacting in the ShenZhen Stock Exchange in 2001 as a sample and made an empirical analysis concerning their present situations of diversification and the correlations among several variables influencing their diversification strategies. For this purpose, the hypothesis between diversification level and various indicators, such as state-owned stock, the proportion of the top stockholders' holding, core competence, and concentration degree of stock equity was established. In the process of verifying the hypothesis, searching for the rule of the diversification strategies of the Chinese quoted companies was followed. The study also found out that the Chinese quoted companies bear multiple burdenssimultaneously from state-owned stock, capital market, supervisory institutions and inner motives, and here occurs the power game among these four variables, ultimately conducing to the unique phenomena in the diversification strategy- making. This study also presented some characteristics of the Chinese market mechanism in transition.