Interdependence and Performance: A Natural Experiment in Firm Scope

This paper shows how interdependencies influence performance in a predictable manner, following a reduction in the scope of a firm's activities. We test the predictions of the theory using detailed micro-data on every Peruvian fishing firm before and after a regulatory ban on mackerel fishing, and find that reducing the scope of firms' activities causes the productivity of firms' legacy anchovy operations to fall sharply, before recovering in the long-run. The results are most pronounced for firms with the strongest interdependencies between activities. Moreover, we find evidence that the persistence of the productivity decline is explicitly tied to a failure to adapt quickly following the ban. Consistent with our conceptual characterization, the evidence suggests that interdependencies between activities simultaneously create benefits as well as costs, but that costs are more persistent when the firm reduces its scope of activities.