Estimating the performance effects of business groups in emerging markets

• Published in: Strategic management journal 2001-01, Vol.22 (1), p.45-74
• Main Authors: Khanna, Tarun, Rivkin, Jan W.
• Format: Article
• Language: English
• Subjects: Alliances; Applied sciences; Business; business groups; Business organization; Business structures; Capital markets; Coefficients; corporate strategy; Correlation coefficients; Datasets; Diversification; Economics; Effects; Emerging markets; Enterprises; Exact sciences and technology; Financial performance; Firm modelling; Hypotheses; Industry; Management; Manycountries; Operational research and scientific management; Operational research. Management science; profit differences; Profitability; Profitable firms; Profits; Statistical analysis; Strategic planning; Studies; Variable coefficients; variance components
• ISSN: 0143-2095; 1097-0266
• DOI: 10.1002/1097-0266(200101)22:1<45::AID-SMJ147>3.0.CO;2-F

Business groups-confederations of legally independent firms-are ubiquitous in emerging economies, yet very little is known about their effects on the performance of affiliated firms. We conceive of business groups as responses to market failures and high transaction costs. In doing so, we develop hypotheses about the effects of group affiliation on firm profitability: affiliation could either boost or depress firm profitability, and members of a group are likely to earn rates of return similar to other members of the same group. Using a unique data set compiled largely from local sources, we test for these effects in 14 emerging markets: Argentina, Brazil, Chile, India, Indonesia, Israel, Mexico, Peru, the Philippines, South Africa, South Korea, Taiwan, Thailand, and Turkey. We find evidence that business groups indeed affect the broad patterns of economic performance in 12 of the markets we examine. Group affiliation appears to have as profound an effect on profitability as does industry membership, yet strategy scholars have a much clearer grasp of industries than of groups. Moreover, membership in a group raises the profitability of the average group member in several of the markets we examine. This runs contrary to the wisdom, conventional in advanced economies, that unrelated diversification depresses profitability. Overall, our findings suggest that the roots of sustained differences in profitability may vary across institutional contexts; conclusions drawn in one context may well not apply to another.