Contraction for the Sake of Expansion: An Oxymoron?

International and business diversification are two common strategies of firms. We present novel theoretical arguments and empirical evidence suggesting that contracting a given diversification path (be it in the international or business dimension), does not only allow firms to expand the other path in the short term, but also to again diversify the initially contracted path, thereby expanding both diversification paths in the long term. We argue and show that when firms contract a given diversification path, they spark two subsequent processes: They free up non-scale free resources from the contracted diversification path to invest in the other diversification path, which allows them to expand this path. In turn, this expansion creates new scale free resources that also facilitate renewed diversification along the initially contracted path.