Firm-Level Diversification and Response to Volatility in the US Manufacturing Sector, 1974-1998

Do firms adhere to a predetermined list of products, as in the widely used assumption in firm-behavior studies or do they keep a portfolio of products flexible over time? This paper uses the Longitudinal Research Database of the U.S. Bureau of Census from 1974 to 1998 to study the trend and cyclicality of firm/plant level diversification of the manufacturing sector in the United States. Empirical results find that firms use diversification as one of the adjustment margins, using within- and between-plant diversification whenever possible. Firm-level diversification decreases as the uncertainty decreases in the U.S. manufacturing sector.