Business Groups in Emerging Markets: Paragons or Parasites?

Abstract

Diversified business (or corporate) groups, consisting of legally independent firms operating in multiple markets, are ubiquitous in emerging markets and even in some developed economies. The study of groups, a hybrid organizational form between firm and market, is of relevance to industrial organization, corporate finance, development, economic growth and other domains of economic inquiry. This survey begins with stylized facts on groups around the world, and proceeds to a critical review the existing literature, which has focused almost entirely on groups as diversified entities and on conflicts between controlling and minority shareholders. Other schools of thought on the political economy of corporate groups, on groups and monopoly power, and on groups as networks are discussed next. We then proceed to promising, yet virtually unexplored, alternative lenses for viewing groups, for example, as quasi venture-capitalists or as family-based structures. The analysis points out important biases in the literature including the avoidance of a serious discussion of the origins of business groups, and the unfounded assumption that rentseeking is the only feasible political economy equilibrium in an interaction between groups and the government. We note that the empirical tendency to use recent data implies that the vast majority of studies exploit cross-sectional variation; the absence of (long) time-series data ensures that some conceptually important issues, such as how groups shape the environment in which they operate, receive relatively little attention. Lastly, we outline an agenda for future research. AcknowledgementsWe are grateful to Kee

Are family ownership and control in large firms good, bad, or irrelevant?

“…In emerging economies with inefficient factor markets for labor, capital, and technology, family CEOs may fill the institutional voids to overcome market inefficiency (Chakrabarty, 2009;Khanna & Yafeh, 2007;Lee, Peng, & Lee, 2008). With weak market-supporting institutional frameworks, access to resources is not through formal channels (such as banks) but often through informal and private networks (Peng, 2003).…”

“…Essentially, business groups form an internal transaction market where allocation of resources is made within groups. Other members of such a group in the pyramid may provide useful information, access to finances and technologies, and important social interactions (Carney, Gedajlovic, Huegens, van Essen, & van Oosterhout, 2011;Khanna & Yafeh, 2007). If the focal firm suffers from poor performance, other member firms may come to rescue it by injecting assets such as funds and talents (Estrin, Poukliakova, & Shapiro, 2009;Gedajlovic & Shapiro, 2002;Hoskisson, Cannella, Tihanyi, & Faraci, 2003;Li, Ramaswamy, & Petitt, 2006).…”

“…A pyramid structure may help member firms in business groups (Khanna & Yafeh, 2007). But these benefits may only outweigh the costs of principal-principal conflicts when expropriation of minority shareholders is curbed.…”

“…The third mechanism, shares with superior voting rights, is popular in Europe and Latin America(Khanna & Yafeh, 2007). But it is not commonly used in Asia (LaPorta et al, 1999), and thus is not considered here.…”

Globalfocusing: corporate strategies under pressure

“…Corporate communications thus often point to fi nancial market pressures when explaining changes of strategy. Recent research sheds doubt on the prevalence of such a discount control, for antecedents of diversifi cation appear to eliminate any statistically signifi cant discount (Campa and Kedia, 2002); in fact, some studies outside Anglo-American countries fi nd group-affi liated fi rms to benefi t from a 'diversifi cation premium' (Kogut et al, 2002;Khanna and Yafeh, 2007). Such scientifi c evidence may have eased pressures to focus in recent years -the belief is still widespread and can infl uence managerial decisions, especially in contexts of highly imperfect information.…”