Firm diversifications are prevalent in many emerging economies in contrast to the practices in developed economies. A fundamental difference between these two types of economies is the existence of sound economic institutions including in particular property rights protection. Indeed it has been argued that diversified firms may thrive in situations of poor economic institutions, but much research is needed to substantiate this idea. In this paper, using a survey data set of private enterprises in China, we examine whether cross-region variations in the degree of property rights protection a¤ect the extent of firm diversification. We find that poorer property rights protection causes firms to be more diversified. We then explore several possible mechanisms through which property rights protection may affect firm diversification.

Firm diversifications are prevalent in many emerging economies in contrast to the practices in developed economies. A fundamental difference between these two types of economies is the existence of sound economic institutions including in particular property rights protection. Indeed it has been argued that diversified firms may thrive in situations of poor economic institutions, but much research is needed to substantiate this idea. In this paper, using a survey data set of private enterprises in China, we examine whether cross-region variations in the degree of property rights protection a¤ect the extent of firm diversification. We find that poorer property rights protection causes firms to be more diversi?ed. We then explore several possible mechanisms through which property rights protection may affect firm diversification.