Can firms be both broad and deep? Exploring the relationship between horizontal and vertical scope

This paper studies interdependencies between the horizontal breath and the vertical depth of firms. The related diversification literature suggests that firms grow in one direction or the other – that is, either horizontally or vertically. However, it is possible that synergies exist allowing firms to grow in both directions if they have slack resources and managerial excess capacity. This potential for interdependency between horizontal and vertical scope decisions and the effect of firm size is tested in the context of Chilean building contractors’ decisions of project types and extent of vertical integration. Our results show that the level of horizontal scope negatively affects the degree of vertical integration and that the magnitude of this negative effect is greater for larger firms. We do not find that vertical integration influences horizontal scope decisions. Thus, there is a relationship between depth and breadth but this relationship is not symmetric. Moreover, larger firms appear to face diseconomies of scope and inertia and thus find it difficult to expand both horizontally and vertically.