Question

General Electric announced it would spin off many of its subsidiaries and instead focus on aviation, power and health care. Honeywell International similarly said last month it would spin off its home and transportation subsidiaries. Are these firms divesting according to the short run or long run planning horizons? Explain.

Answer 1

This is the long run decision because firms in the short run find it difficult to close down business operations due to various fixed costs commitments. In the long run however they are able to avoid the fixed cost and therefore they can shutdown their business operations that are not able to cover even the variable cost of production. In this case also because the firms are deciding to shut down their subsidiaries it implies that they are attempting to leave the industry and this happens only in the long run