Diversified business groups and corporate restructuring in China

Abstract

Purpose -This paper aims to explore the roles different ownership structures, the joint effect of related and unrelated diversification strategies, and previous performance levels have on the restructuring strategies of such firms. Design/methodology/approach -Annual reports of publicly traded firms in the two Chinese stock exchanges are used to collect data. Multiple regression and ANOVA analysis are used to examine the impact of ownership structure types, match between diversification strategies, and previous performance on the change of business scopes of the sample business groups. Findings -Compared to other ownership types, government owned business groups tend to increase their business scope during asset restructuring, while private business groups tend to decrease their scopes through divestitures and spinoffs. Poor previous performance is also found to be negatively related to change in business scopes. The ''match'' between related and unrelated diversification strategies of the business groups leads to increase in business scopes, while ''mismatch'' between these two strategies tends to lead to decrease in business scopes.Practical implications -This study provides some recommendations to managers and public policy makers in emerging economies. There is a need to monitor the changing institutional environment a firm operates in. It is up to the managers of business groups to determine the degree of market imperfections they are facing and the need to compensate with internal market mechanism and social exchange mechanism within the group structure. As China opens its door further to private ownership and foreign ownership, the pressure to increase efficiency and effectiveness along with the continuous improvement of the institutional environment will require that managers adopt strategies that can enhance the competitiveness of the firms, whether it is through further diversification or scope reduction. Originality/value -This research deepens our understanding of restructuring strategies of Chinese business groups, by linking factors such as ownership structure, diversification strategies, and past performance to scope changes in these groups. It can broaden our understanding of corporate restructuring in transitional economies, such as China and India.

Ownership structure and corporate diversification strategies of Chinese business groups

“…The previous performance levels did not seem to have any impact on firms' diversification levels, which was different than other studies have suggested (e.g. Zhao, 2009).…”

“…received a code of one. Since firms might change their diversification directions as a result of performance decline (Zhao, 2009), previous performance was also included in the control variables – the 1999 return on sales (ROS, 1999) was used as an indicator. Debt/equity ratio (D/E ratio) was also included to control for the possible impact of financial structure on diversification strategies.…”

Profit‐tax relationship, business group affiliation, and external monitoring in china

“…The Chinese government defines a business group as "an economically collected organization that consists of a parent firm and numerous legally independent entities and non-legal organizations that are linked by investment, production or operational collaboration" (State Statistics Bureau of China, 2001). As business groups are usually formed through vertical or horizontal integration, they are more diversified and complex than non-group firms regarding ownerships, product lines and industries, and geographic locations (He et al, 2013;Ma et al, 2006;Zhao, 2009). Chinese business groups emerged as an important organizational form during the mid-1990s when the government undertook numerous economic reforms to build giant industrial corporations through the cross-ownership of businesses in multiple industries and regions as a means to achieve faster economic growth and compete in the global market.…”

Challenges for long-term industry restructuring in the Upper Silesian Coal Basin: What has Polish coal mining achieved and failed from a twenty-year perspective?

“…However, the effects of restructuring through consolidation are not so obvious in practice. Finally they are influenced by many different factors, such as the form of consolidation (Edenhoffer and Hayter, 2013a), the primary and post-consolidation organizational structure (Beck et al, 2008;Grünera, 2009), the activities taken in the post-consolidation stage (Cronin and Motluk, 2004;Hoberg and Phillips, 2010;Maksimovic et al, 2011), the type of enterprise ownership (Lu and Yao, 2006;Zhao, 2009) as well as local and regional economic conditions (Williams and Nguyen, 2005;Barros and Williams, 2013).…”

“…State-owned enterprises usually engage in internal growth through an increase of assets. Private enterprises usually opt for external growth, using mergers and acquisitions (Zhao, 2009).…”