Estimating the performance effects of business groups in emerging
markets
Strategic Management Journal, 22 (1):
45-74 (2001)Khanna, T Rivkin, JW.Abstract
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.