Research Policy 30 (2001) 1165–1184 Diversification dynamics of the Japanese industry Kiminori Gemba ∗ , Fumio Kodama Research Center for Advanced Economic Engineering, University of Tokyo, Tokyo, Japan Received 20 June 1998; received in revised form 5 October 1998; accepted 27 September 2000 Abstract The diversification dynamics of R&D activities and business of Japanese industry was analyzed. The diversification of R&D activities developed in many industries during the 1980s but did not develop well during the early 1990s. There were some industries of which diversification in business developed just as it followed their R&D activities. The direction of diversification in R&D activities and business was also analyzed. It was found that the direction of diversification for high-tech and scale-intensive industries was downstream. Furthermore, the relationship between “diversification” and “performance” was analyzed using quantitative methods. The analysis showed that profitability dropped generally in industries which were highly diversified in unrelated fields. On the other hand, the progression of diversification in unrelated fields contributed to high sales growth. In addition, according to the results of the case study and quantitative analysis, it was found that diversification strategy that expanded into downstream activities with core technology or core component technology contributed to increased profitability. © 2001 Elsevier Science B.V. All rights reserved. Keywords: Diversification; Profitability; Entropy; Downstream; Japanese industries 1. Introduction Recently, many Japanese firms which are very diversified are concentrating on their primary business operations. These diversified firms had increased prof- its during Japan’s high economic growth period of the 1980s. However, in the present low economic growth period, firms which are too diversified from its core businesses are supposed to have reduced profitability. Moreover, firms which diversified into fields related to their core business field have an advantage over those firms which diversified into unrelated fields. There- fore, firms who are concentrating their business oper- ations into related fields are becoming more common. ∗ Corresponding author. Tel.: +81-3-5452-5291; fax: +81-3-5452-5292. E-mail address: kimi@fklab.rcast.u-tokyo.ac.jp (K. Gemba). Diversification studies in Japan have been quali- tative, based on case studies. Very few quantitative analyses have been conducted on the relationship between “the diversification of firms or industry” and “performance”. Based on these viewpoints, this pa- per will quantitatively analyze “diversification” and “performance”. Previous research on diversification was conducted based on firms as their unit of analysis. However, detailed and concise data about firms are difficult to obtain. Japan passed a law which required firms to make public their sales for their diversified business operations in their financial statement. Now, sales data for all business operations can be distin- guished, although the information is still in aggregate. Therefore, in order to distinguish diversification in related and unrelated fields, subjective decision mak- ing was necessary and standardized measurements of the degree of diversification was difficult to make. 0048-7333/01/$ – see front matter © 2001 Elsevier Science B.V. All rights reserved. PII:S0048-7333(00)00140-2