Business Diversification, Enterprise Nature And Performance

There has never been a definitive answer to the question about the impact of diversity on company performance.Academics generally believe that diversification is difficult to create economies of scale,resulting in waste of resources and energy dispersion.So,it is not conducive to business performance,companies which want to obtain sustainable development should focus on a few industries.However,the flourishing development of some large enterprise groups seems to contradict this theory.Whether diversification will really damage corporate performance remains to be discussed.In China,due to the unique ownership structure and distribution methods,companies can be compartmentalized into private enterprises and state-owned enterprises.And the state-owned enterprises can be compartmentalized further into local state-owned enterprises and central state-owned enterprises according to actual controllers.For all the state-owned enterprise operators,diversification can achieve rapid expansion of the scale,stimulating the local economy,and promoting employment,which is undoubtedly the best way to achieve political goals.This paper takes the diversification and the nature of the enterprise as the starting point,takes the A-share listed company as a sample,and adopts the combination of quantitative and qualitative methods of “propose the problempositive analysis-interpretation result-positive verification” to study the nature of the enterprise and the relationship between business diversification and company performance.The innovation of this paper is that the state-owned enterprises are further compartmentalized into local state-owned enterprises and central state-owned enterprises,which are not studied respectively in the existing papers.This paper not only points out the current status of their diversification and performance,but also explains the phenomenon separately,and uses empirical research to verify the interpretation.The logical structure of this paper is as follows:First of all,we study related literature,combing the relationship between diversification and business performance,the relationship between corporate nature and diversification,and extracting the measurement methods and empirical methods.Secondly,we expound the diversification process and the status quo of China,and directly describes the diversification evolution process of China's three different kinds of enterprises.Next,the paper proposes two research hypotheses: Hypothesis 1: The level of diversification of local state-owned enterprises is significantly higher than that of private enterprises and central state-owned enterprises.Hypothesis 2: Diversification of state-owned enterprises(including central state-owned enterprises and local state-owned enterprises)will significantly reduce their corporate performance.After that,empirical research is used to verify the above hypotheses one by one.And explanations are given as following:For central state-owned enterprises: Their non-main investment of central state-owned enterprises is subject to earlier and stricter restrictions than local state-owned enterprises.Furthermore,because of the strong monopoly of the industries in which they operate,the incentive to enter other industries is weak.When central state-owned enterprises increase their diversification and enter other non-high barrier industries,they will lower their performance levels.Moreover,the diversification of central state-owned enterprises is accompanied by larger employee growth than private enterprises and local state-owned enterprises.Therefore,the diversification level of central state-owned enterprises is lower than that of local state-owned enterprises,and diversification will reduce their performance.As for Local state-owned enterprises,they have assumed certain political functions,which are the main carriers for the government to intervene in the local economy.So they have a strong willingness to expand in scale.However,under the “promotion of the championship” based on the GDP growth rate,the company's investment outside the local region is limited.Since the scope of investment is limited to the local region focusing on a certain industry will inevitably be restricted by the scale of local demand or supporting industries,so diversification is a necessary way to achieve scale expansion.However,the local state-owned enterprises' diversification decisions are not out of the needs of enterprises' development,which distorted and violates the principle of economic benefits.Therefore,diversification also damages the corporate performance of local state-owned enterprises.Finally,the paper points out that the blindly pursue of diversification in state-owned enterprises has plenty of damages,such as enterprises are big but not strong,difficulty of forming core competitiveness,redundant construction and waste of resources.What's worse,the resulting high tax burden and market space squeeze can also crowd out private enterprises,which is referred as “state advance,private retreat”,deviating from the reform direction.Corresponding recommendations are listed as following:(1)take fully advantage of the market's role in the allocation of resources and build up a modern company management system in state-owned Enterprises.(2)Promote the reform of the personnel system in state-owned enterprises.(3)Take care of the fair competition environment of private enterprises and strictly control the non-main investment of central state-owned enterprises.(4)Optimize the assessment index system of local governments and guide government officials to establish a correct view of political achievements.Due to my limited research capacity,there are many shortcomings in this study.Here are some prominent ones: firstly,the research sample is limited to listed companies,which leads to survivor bias.Then,there is no in-depth discussion about financing constraints.Finally,the classification of the enterprises' nature is relatively rough,limiting to the three kinds of enterprises.And it lacks subdividing of local state-owned enterprises.So,the subsequent research can aim at three aspects: industry segmentation,diversification segmentation,and the segmentation of local state-owned enterprises,which probably also draw meaningful conclusions.