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

Multi-Business Firms, Knowledge Flows and Intra-Network Open Innovations

“…One important determinant of internal networks being comparatively more efficient than external exchanges is, among others, precisely the efficiency with which product and factor markets conduct transactions externally (Chakrabarti et al 2007;Khanna and Yafeh 2007). Bearing in mind that most product and capital markets work in an increasingly more correct manner in developed economies, the opportunities for a multi-business firm to beat those markets through internal arrangements in order to conduct capital and product flows are rather scarce (Shackman 2007).…”

Group Affiliation and Firms’ Export Intensity: A Cross-Country Study

“…One dominant approach in the business group literature argues that groups are paragons: they play an important function for economic development in emerging economies, because they compensate and make up for market failures and institutional weaknesses (Leff, 1978;Khanna and Palepu, 1997;Khanna and Yafeh, 2007;Carney et al, 2011). This view is often referred to as the institutional voids thesis (for a more extensive presentation of this approach, see Castellacci, 2013a).…”

“…There exist several different definitions, and empirical studies have made use of a variety of distinct strategies to identify and measure group affiliation (Khanna and Rivkin, 2001;Khanna and Yafeh, 2007). Most studies, however, point out that business groups have three typical characteristics: (1) they are formed by legally independent firms; (2) there exist stable (long-term) relationships among affiliated companies; (3) group-affiliated firms are all subject to some sort of common ownership and control, e.g.…”

Diversification and Performance of Group-Affiliated Firms during Institutional Transitions: The Case of the Chinese Textile Industry

“…A dominant theoretic strand in business group study is that the benefits of group affiliation arise, at least partly, from the affiliated firms' access to 'extra' (or 'institutional') resources embedded in institutional environments (Granovetter, 1995) via group internal markets, while external market conditions are still imperfect and institutional foundations remain inadequate (Khanna and Yafeh, 2007). Therefore, it is very natural that researchers have begun to study differences in diversification strategy outcomes across different stages of institutional transition (Kedia et al, 2006;Kim et al, 2004b;Lee et al, 2008).…”

“…In emerging Asian economies, group affiliation has often been found to be profitable (Carney, 2008;Khanna and Yafeh, 2007). Under such circumstances, group affiliation may benefit firms by providing access to scarce resources embedded in institutional environments (Granovetter, 1995) via the internally built markets that substitute for the imperfect external product, capital and labor markets (Chang and Choi, 1988;Khanna and Palepu, 2000).…”