Wholly-owned vs. collaborative ventures for diversifying financial services

Diversification is often pursued as a means for firms to exploit their specific assets or capabilities. Input supply contracts provide one way of supporting a diversification effort by allowing a firm to rely on the resources of outside producers through a collaborative agreement. However, high transactions costs may preclude such collaboration and encourage wholly-owned new entries instead. The deregulation of the financial services industry in the UK during the 1980s provides an opportunity to study the conditions that determine which of the two diversification options is chosen by firms. Analysis of data from 292 new entrants in 13 financial products markets reveals that collaboration is chosen by firms that want to ease a resource limitation, while full ownership is the option preferred by those characterized by specificity.