Abstract
Manuscript Type: Empirical Research Question/Issue: Institutional
and transaction cost theories highlight the idea that group-affiliated
firms outperform unaffiliated firms in emerging economies. However,
the persistence of superior performance among group-affiliated firms
could be challenged by the recent, quick development of markets and
institutions in these countries. This article explores the link between
firm performance and the evolution of the institutional environment.
Research Findings/Insights: We analyze how business group affiliation
affected firm performance in India in the post-reform era, i.e.,
from 1990 to 2006. Our findings show that: (1) the performance benefits
of group affiliation are evident in the early phase of institutional
transition, but level out in the late phase; (2) older group-affiliated
firms are better able to cope with institutional transition than
younger group-affiliated firms; and (3) group-affiliated service
firms are better able to cope with institutional transition than
group-affiliated manufacturing firms. Theoretical/Academic Implications:
Our findings support institutional and transaction cost theories,
as they show that: (1) when labor, capital, and products markets
are characterized by large imperfections and weak supporting institutions
business groups outperform independent companies; (2) when markets
become more efficient and institutions grow stronger group-affiliated
firms fail to show continued superior performance; and (3) heterogeneity
among member firms may influence the appropriation of the benefits
arising from group affiliation. These findings expand the traditional
understanding of the relationship between firm performance and the
institutional context in emerging economies, and provide further
support for the idea that the relative performance of group-affiliated
firms is contingent upon the characteristics of the institutional
context and their particular features. Practitioner/Policy Implications:
The article has implications for managers and policy makers. Managers
of business groups should adapt the timing of strategies to the evolution
of the institutional environment. Policy makers should focus on the
consequences of their policies, as they may undermine the efficiency
of large national companies. © 2009 Blackwell Publishing Ltd.
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