Multiproduct firms often diversify into technologically related activities to exploit
efficiencies of joint production; however, unrelated products in the company’s portfolio
provide access to distinct markets and can help to avoid industry-specific shocks.
Yet, the underlying mechanisms of related and unrelated diversification are still
poorly understood. Here we investigate diversification decisions of firms in periods
when corporations’ markets are hit by a demand shocks. In these times, cost efficiency
considerations might drive firms to reduce costs by narrowing product portfolios and
focusing on combinations of technologically related products, in which economies of
scope and mutual capabilities can be exploited. To test this hypothesis, we consider
two measures of demand shocks, decreasing sales volumes on the product market and
increasing import competition; and analyze their association with changes of product
portfolios of Hungarian firms in the 2003-2012 period. We find that production has
become more coherent in terms of technological relatedness after firms were exposed
to demand shocks. Evidence suggests related adjustment of firm production after demand
shocks such that products unrelated to firms’ core product are dropped from the portfolio
but related products are added.
