An Empirically Based Model of Firm Diversification * Giulio Bottazzi † Angelo Secchi Sant’ Anna School for Advanced Studies March 14, 2005 Abstract This paper presents an analysis of the growth patterns of the worldwide top 198 firms in the pharmaceutical industry. A test of the Gibrat’s Law of Proportionate Effect is performed and we find, in line with previous literature, a violation concerning the variance of growth. Using disaggregated data on submarkets we are however able to show that this violation can be completely accounted for by a diversification effect, namely a scale relation between the number of sub-markets in which a firm is active and its size. To interpret these findings we propose a stochastic branching model of firms diversification consistent with a notion of cumulative corporate competences. JEL Codes: L1,C1,D2 Keywords: branching process, diversification, Gibrat Law, cumulative corporate compe- tences * The authors thanks U. Cantner, C. Castaldi, G. Dosi, P. Geroski, S. Klepper, M. Lippi and L. Ors- enigo for helpful comments and useful discussions. Support from Italian Ministry of University and Research (grantA.AMCE.E4002GD) and from S.Anna School of Advanced Studies (grant E6003GB) are gratefully ac- knowledged and by the EPRIS Project, sponsored by the Merck Foundation is gratefully acknowledged. The usual disclaimers apply. † Corresponding author : Giulio Bottazzi, Scuola Superiore Sant’Anna, P.za Martiri della Liberta’ 33, 56127, Pisa, Italy. e-mail : bottazzi@sssup.it, Phone : +39-050-883343, Fax : +39-050-883344. 1