Do Business Groups Change With Market Development?

Abstract

Khanna and Yafeh hypothesize that business groups should be more common in economies with less developed markets and institutions. We test the time-series version of this hypothesis by looking at changes in Chilean groups over 20 years (1990Chilean groups over 20 years ( -2009Business groups are prevalent in emerging markets (e.g., Brazil, India, China, South Korea) and developed markets (e.g., Italy, Sweden). Yet, despite their extended presence, we know little about why they form and how they evolve. Khanna and Yafeh 2007 put forward several hypotheses in this respect. One hypothesis is that business groups should be more common in economies with less developed markets and institutions. Basically, business groups act as substitutes for capital, goods, or labor markets when frictions are severe. A first approach to test this idea is to make cross-country comparisons on the prevalence of business groups as a function of variables that proxy for market development. A second approach is to use within-country, time-series data to see whether business groups correlate with market dynamics. The time series approach has the advantage of controlling for country unobservables that blur cross-country comparisons.In this paper we contribute to the literature on business groups precisely by performing a country-study in the style of the second approach described above.

How Do Internal Capital Markets Work? Evidence from the Great Recession*

“…Moreover, there is little movement in ownership relationships across the entire sample period 2001-2013. This is consistent with the general stability of ownership structures in this market (Donelli, Larrain, and Urzúa, 2013), and the fact that most Chilean business groups were structured in the 1980s and 1990s (Larrain and Urzúa, 2016).…”

“…endogenous to the crisis since the shock was external to the country and largely unanticipated. Chilean business groups were formed well before the crisis, mostly in the 1980s, and their structure has been very stable (see Donelli, Larrain, andUrzúa, 2013, andUrzúa, 2016). Although we do not find that the structure of business groups changed in anticipation or during the crisis, we admit up-front that we cannot solve the endogeneity of group structure in a general sense.…”

The Evolution of Ownership Structures: Privatization, Business Groups, and Pyramids

“…Privatized firms in Chile were more likely to belong to a business group, and firms sold to buyers connected to the government were more likely to be placed at the bottom of pyramids. Also consistent with Franks et al (2011) and Larrain and Urzúa (2016) we report evidence of persistence in the ownership results; we find that in 2005, after fifteen years of ruling by a democratically elected center left coalition which was very critical of the dictatorship' policies, the ownership differences remain. We also show that most privatized firms became part of new (instead of traditional) business groups.…”

Business Groups Reconsidered: Beyond Paragons and Parasites

“…During the 1980s, many of Hong Kong's colonial era British owned Hongs were absorbed into BGs owned and controlled by local entrepreneurs; for example, Hutcheson-Whampoa was absorbed by Li Kashing's Chueng Kong Holdings. In Chile, there was a slow churning of BGs and some groups were absorbed by others -in particular older family owned groups, such as Endesa, were acquired by foreign owners (Larrain & Urzúa, 2016). In these cases, BG prevalence persists, but ownership changes facilitate a transition to more adaptable businesses.…”