Diversification, policy shock, and firm performance: An empirical study of the game industry in China

• Main Author: LI, Weiwei
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2024
• Subjects: policy shock; diversification strategy; game; DID method; Asian Studies; Strategic Management Policy
• Online Access: https://ink.library.smu.edu.sg/etd_coll/576; https://ink.library.smu.edu.sg/context/etd_coll/article/1574/viewcontent/GPBA_AY2021_DBA_Li_Weiwei.pdf
• Institution: Singapore Management University

Based on the reform of the game licence approval system in 2018, this thesis studied how diversification strategies influence the ability of game enterprises to withstand risk shocks. Specifically, using financial data from A-share enterprises and third-party game product data, this thesis applied econometric methods to examine and obtain a comprehensive picture of the policy effect on the performance of game enterprises, and explored how different diversification strategies affect risk. Taking other application software enterprises as the control group, this thesis explored the effect of the policy shock on business performance using a difference-in-differences method. The profitability of game enterprises was found to decline significantly relative to other software enterprises after the policy shock. The thesis further examined how product diversification, industrial diversification, and international diversification affect enterprises’ ability to withstand shocks. The results showed that although the three diversification strategies reduced enterprises’ return on assets in peacetime, they had different effects in the face of the policy shock. Specifically, the product diversification strategy did not help enterprises mitigate the decline in performance caused by the shock, with product diversification in the game industry leading to a further decline in profitability. The industrial diversification strategy in different industries could effectively help enterprises withstand risks, such that their performance declined less after the policy shock. The international diversification strategy had an effect similar to that of industrial diversification by reducing the policy shock’s deleterious effect on enterprises. Furthermore, the net effect of international diversification after the shock was positive, namely the “premium” generated during the crisis was greater than the “discount” in normal times. Overall, the risk sharing effect of international diversification was better than the the risk sharing effect of industrial diversification. Not only did it generate a lower “discount” than industrial diversification in normal times but it also generated a higher “premium” during the crisis. This thesis concludes that related diversification has a lower ability to diversify risks than unrelated diversification. When dealing with risk shocks in specific fields, only through unrelated diversification strategies, such as industrial diversification and international diversification, can enterprises stabilise returns and diversify risks.