Skill-relatedness and firm diversification

According to the knowledge-based view of the firm, a firm’s workforce is its most important resource, and firms often diversify into activities that allow them to leverage human resources. Human capital also represents a main asset for employees. When switching jobs, individuals are expected to remain in industries that value the skills that they have developed in their previous work. Based on this observation, this article develops theoretical arguments and a statistical method that uses cross-industry labor flows to assess the skill-relatedness between industries. Industries classified in different sectors of the economy sometimes exhibit strong skill-relatedness linkages. Also, industry space, i.e., the resulting network that connects industries with overlapping skill requirements, is highly predictive of diversification moves on the part of firms. Diversification is found to be over 100 times more likely to occur into industries that have ties to a firm’s core activity in terms of skills than into industries that do not. This effect of skill-relatedness eclipses the effect of other types of relatedness, such as value chain linkages and classification-based relatedness.

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