In the economics and strategy fields, researchers seek to understand the antecedents of firm profitability. How and why do certain private enterprise firms develop competitive advantages in environments of rapid technological change while other firms do not? This study extends recent variance decomposition research in three ways. First, this work compares IT sectors in Taiwan and South Korea by using the Standard & Poor's Compustat (R) Global Vantage database. Second, this investigation tests industry and firm effects using both the multilevel approach of hierarchical linear modeling (HLM) and the conventional variance components approach (VCA). Third, this study explores the question of why there are significant profitability differences among technological firms even with similar industrial structural characteristics and leveraged resources and capabilities in the same IT industry. This study uses data from the U.S. Patent Office to estimate technological diversification at the level of firm resources for knowledge-based relatedness for the IT firms of Taiwan and South Korea. The empirical results find that firm effects have great impact on performance of the IT sectors of Taiwan and South Korea when estimated by either HLM or VCA. However, industry effects dominate firm effects on South Korea's IT sectors when the variance is estimated by HLM. From the perspective of conducting patents innovation, both of the specialized and diversified corporate strategies are matter to the development of these IT sectors, and South Korea's IT firms are more technologically diversified than those firms in Taiwan. (C) 2009 Elsevier Inc. All rights reserved.
