Product diversification and large construction firm productivity: the effect of institutional environments in Malaysia

Purpose Many large construction firms (LCFs) adopt product diversification (PD) to counter downturns and spread risks. However, no detailed information is available concerning the type of PD that improves their performance. In addition, it is still uncertain how much changes in institutional dimensions influence the effectiveness of PD. Therefore, the aim is to resolve this issue by establishing a model that shows the extent of this influence. Design/methodology/approach The generalised method of moments (GMM) estimator is used to model the PD strategies of 86 LCFs in Malaysia over 14 years (2003-2016) and its impact on productivity and profitability performance. Findings Unrelated diversification (UD) decreased firm performance in 2003-2016, while related diversification (RD) had a positive impact during the more liberal 2010-2016 phase. The models show that the impact of PD is highly dependent on changes in institutional dimensions. Practical implications Firstly, managers may adjust the type of PD and its level of diversification to improve firm performance. Secondly, they may devise PD strategies based on changes in institutional dimensions to maximise their effectiveness. Originality/value The study contributes to the literature by determining the optimal amount of PD (including RD and UD) and its impact on performance. Secondly, the study is the first to investigate the moderating relationship of the institutional dimensions of economic and regulatory institutions on PD-firm performance. Thirdly, the study is the first to explore the components of technical-scale-scope economies (movement towards and around the production frontier), this being crucial to the strategy that was only conjectured in previous studies.

Automated summary

This study investigates the impact of product diversification on the performance of large construction firms, finding that the influence of diversification depends significantly on changes in institutional dimensions. Managers can adjust PD strategies based on institutional changes to enhance firm performance.