Review of Industrial Organization (2005) 27:125–145 © Springer 2005
Are EU Leading Firms Returning to Core
Business? Evidence on Refocusing and
Relatedness in a Period of Market Integration
and DAVIDE VANNONI
Politecnico di Torino, DISPEA, Corso Duca degli Abruzzi, 24, 10129 Torino, Italy;
Department of Economics, University of Turin, Corso Unione Sovietica 218, 10134
Ceris-CNR, Institute for Economic Research on Firms and Growth, Via
Real Collegio 30, 10024 Moncalieri, Italy
Abstract. This paper tests, for 108 diversiﬁed EU manufacturing leaders faced by the EU
integration shock (1987–1997), if ﬁrms responded to increased competitive pressure by
readjusting their industry-mix around a core of related activities. Our results show that, in
spite of limited reduction in diversiﬁcation, ﬁrms pursued strategies of related constrained
diversiﬁcation by expanding the output of industries related to the core. We also ﬁnd that
complementarity amongst the ﬁrm’s operations – i.e., sharing common intermediary prod-
ucts or common output markets – drives the refocusing. The effect is stronger for highly
diversiﬁed ﬁrms. Our ﬁndings suggest that EU leaders are moving toward a more efﬁcient
use of their resources.
Key words: European integration, ﬁrm diversiﬁcation, return to core.
JEL Classiﬁcations: L11, L22, F15.
Most studies in the empirical literature ﬁnd a negative relationship between
diversiﬁcation and performance, either measured by proﬁtability, productiv-
ity or stock market returns.
Within the last two decades, product and cap-
ital markets discipline is viewed as the main force leading companies to
refocus or return to their core business.
Even semantically, however, the notion of re-focussing implies a histori-
cal perspective whereby ﬁrms at some point in time pursued multi-product
strategies that expanded the scope of their activities beyond their core
Author for correspondence. E-mail: email@example.com
Lang and Stulz (1994), Lichtenberg (1992), Berger and Ofek (1995), Lamont and
Polk (2001), and Schoar (2002).