We estimate the impact of diversification on the performance of farm businesses using measures of economic viability among farms in Scotland and Sweden. We derive indicators of viability using national level accounting surveys for the period 2000–2012 and account for short-term and long-term effects within our estimates of viability.

A higher proportion of Scottish farms emerge as being more short-term and long-term viable than Swedish farms. This could, we propose, be due to emphasis on enhancing farm viability within Scottish planning for rural development, compared to Sweden which emphasized productivity and environmental enhancement. Moreover, for both countries the trend in viability is relatively stable until 2007, when both panels begin to display the impact of policy and market change.

Findings based on a multinomial logistic regression indicate that farms which run additional ventures outside traditional agriculture, and are diversified in the sense that they obtain revenue from two or more agricultural enterprises, are more viable compared to specialized agricultural units. Other factors which affect viability were found to be structural, biophysical and institutional, specifically the reform of the Common Agricultural Policy (CAP) in 2003. However the significance and magnitude of these effects differ across the two countries. Consequently, these results seem to imply the importance of emphasizing non-specialized agricultural activities within rural development policy and, moreover, informs the rationale behind proposed redistributions of CAP payments.