Build or Buy? Human Capital and Corporate Diversification

Why do some firms enter a new sector by building on their resources ("build") while others buy an existing company ("buy")? Using French administrative data, we propose a measure of human capital distance between a firm and a sector of entry. We show that firms build in close sectors and buy in distant sectors in terms of human capital. We establish causality using a shift-share instrument. Firms build by hiring new workers, which is more costly in distant sectors because it requires more organizational skills. Hence, firms buy in distant sectors to acquire already operational human capital.