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Horizontally diversified firms in related or unrelated industries are prevalent in many emerging economies. While it has been argued that diversified firms may thrive in situations of poor market institutions, much research is needed to substantiate this idea. In this paper, using a survey data set of private enterprises in China, we examine how firm scope varies with respect to property rights protection, and how firm performance changes in the degree of property rights protection. We find that the horizontal scope of firms increases in the severity of property rights expropriation, and that firm performance decreases in property rights expropriation but this negative impact decreases with the horizontal scope of the firm. Our findings are robust to the use of alternative measures of firm scope, different indices of property rights protection, and two alternative instrumental variables for the property rights protection indices to control for the potential endogeneity problems.
UC Berkeley on May 6-7, 2011 Link to Book