Why are Firms Different?

Abstract

We analyze a continuous time model in which two firms make stochastic investments in stocks of complementary strategic resources, productive assets that take a long time to build and often can be used in more than one market. The option to diversify means that investments in strategic resources typically do not face saturating incentives – unlike what is the case with investments aimed at increasing share in a single market. In fact, because the strategic resources are complements, the firm with more of them will have stronger incentives to invest and will thus have a better than 50/50 chance of pulling further ahead. The result does not depend on whether larger investments pay off faster or in bigger pieces.