Abstract
To understand the performance implications of corporate strategies
as conditioned by business group affiliations, we analyze the relation
between corporate diversification and performance for 889 Indian
firms. We find that diversified firms perform significantly worse
than focused firms and that there exists a significant negative relation
between the degree of diversification and firm performance. A comparative
analysis of firms affiliated with Indian business groups and those
affiliated with MNCs indicates that the sources of negative impact
of diversification on performance are conditioned by the nature of
a firm's affiliation. For multinational affiliates, diversification
is associated with poor asset quality and asset management, which
is an indicator of possible agency conflict. For domestic business
group affiliates, diversification is associated with cost inefficiencies
and poor performance. © 2006 Elsevier Inc. All rights reserved.
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