Diversification and Performance of Nigerian Manufacturing Firms

Abstract

Nigeria’s manufacturing sector contributes just 8–9% of GDP below the lower-middle-income country benchmark of 10–16%. Against this backdrop, this study examines how corporate diversification strategy shapes the market-based performance of listed Nigerian manufacturing firms over the period 2013–2023. This study focuses on three things the existing literature has not yet carefully examined: whether performance effect differs by diversification type, whether the relationship follows a non-linear path, and whether there is an optimal diversification threshold beyond which further expansion begins to destroy rather than create value. Using an unbalanced panel of approximately 3,850 firm-year observations drawn from NGX-listed manufacturers, four regression models are estimated with Tobin’s q as the dependent variable. Diversification is measured using three complementary instruments: segment count, the Herfindahl-Hirschman Index, and the Entropy Measure decomposed into related and unrelated components following Jacquemin and Berry (1979). Four findings emerge. Aggregate diversification is negatively associated with market-based performance, confirming a diversification discount. Related within-industry diversification, however, earns a performance premium, while unrelated conglomerate diversification carries a penalty. The relationship is non-linear, with an estimated performance-maximising threshold of approximately five to six business segments. Firms operating at this level generate significantly stronger accounting returns, even as equity markets apply a governance discount. It concludes that diversification type and intensity matter more than diversification in aggregate. Managers are advised to expand within their area of genuine competence rather than pursue conglomerate breadth. Policymakers should address the institutional voids that currently incentivise value-destroying unrelated diversification among Nigerian manufacturers.