Technological relatedness: how do firms diversify their technology?

The principle of relatedness, which helps estimate the affinity between economic activities, suggests that countries, regions and cities tend to undertake new economic activities when they already perform related activities. This empirical principle has been confirmed for various dimensions-cities, regions, and countries-and their activities-developing new technologies, products, and industries. However, the technological diversification of firms is relatively unexplored. Is a firm more successful at entering a new technology when it has already accumulated related technologies? Here, we explore this issue using a unique dataset that contains firms' patent data and financial and market information. In particular, we examine Korean firms listed on the Korean stock market that published patents at the patent offices in Korea, Europe and the United States from 1984 to 2014. We develop a technological relatedness measure to estimate whether a firm has already published patents with similar technologies. We find that firms are more likely to develop a new technology when they already have related technologies. Furthermore, We also check the robustness of this effect with varying the definition of proximity and by using propensity score matching. Our findings suggest that the effects of technological relatedness remain significant when varying the proximity and controlling for potential confounding effects. These findings extend the concept of relatedness to a firm's technological diversification and show that the development of a firm's technological knowledge is shaped by its technological relatedness.