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The Future of Business Groups in Emerging Markets: Long Run Evidence from Chile
Abstract
We demonstrate variation in the extent to which firms benefit from their affiliation with Chilean business groups in the 1988-1996 period. The net benefits of unrelated diversification are positive if group diversification exceeds a threshold level, though this threshold increases with time. We find evidence of non-diversification related group benefits, which atrophy over time. We conjecture that the evolution of institutional context alters the value creating potential of business groups, though it does so slowly.
... Their study, one of the first to employ event study methodology in the Indian context, found that announcements related to governance improvements were generally met with positive stock price movements, highlighting the market's sensitivity to governance quality. A significant contribution to the literature was made by Khanna and Palepu (2000) [6] , who delved into the complexities of corporate governance in emerging markets, with a focus on India. They argued that unique features of the Indian market, such as family-owned conglomerates and state ownership, necessitate a tailored approach to governance assessment. ...
... Their study, one of the first to employ event study methodology in the Indian context, found that announcements related to governance improvements were generally met with positive stock price movements, highlighting the market's sensitivity to governance quality. A significant contribution to the literature was made by Khanna and Palepu (2000) [6] , who delved into the complexities of corporate governance in emerging markets, with a focus on India. They argued that unique features of the Indian market, such as family-owned conglomerates and state ownership, necessitate a tailored approach to governance assessment. ...
... A recurring theme across these studies is the critical role of institutional frameworks and market-specific factors in determining the effectiveness of governance practices. This is particularly evident in works like Khanna and Palepu (2000) [6] , which highlight the need for governance assessments to consider the idiosyncratic features of emerging markets. Moreover, the shift towards incorporating ESG factors, as seen in Gupta and LeCompte (2020) [8] , represents a significant expansion of the corporate governance discourse, aligning with global trends towards sustainability and corporate responsibility. ...
This research paper investigates the relationship between corporate governance and stock price performance in the context of Indian publicly listed companies, spanning the period from 2018 to 2022. With the dual objectives of analyzing the impact of corporate governance practices on stock price performance and exploring sectoral variations in this relationship, the study employs a quantitative methodology, focusing on a dataset sourced from 30 sensex companies of the Bombay Stock Exchange (BSE). Through the application of linear regression models, the research analyzes the correlation between corporate governance scores and stock prices, while ensuring model validity through rigorous diagnostic tests. The key findings reveal a significant positive correlation between robust corporate governance practices and enhanced stock price performance. Specifically, higher corporate governance scores are associated with increased stock prices, indicating that the market places a premium on strong governance mechanisms. These results are robust to various model validation checks, including tests for multicollinearity, autocorrelation, and heteroscedasticity. The implications of this study are significant for investors, regulators, and companies within the Indian market. For investors, the findings underscore the importance of incorporating governance assessments into investment decisions. For regulators, the results support the ongoing efforts to strengthen corporate governance frameworks. For companies, the research highlights the financial benefits of adhering to high governance standards. Overall, this study contributes to the broader discourse on corporate governance, offering empirical evidence from an emerging market perspective and underlining the crucial role of governance in enhancing stock market performance.
... Os grupos de negócios são retratados como mecanismos entre empresas para lidar com as deficiências do mercado (Khanna, & Palepu, 2000;Leff, 1978). No entanto, o que não tem sido enfatizado é o fato de suas atividades serem impulsionadas por seu principal objetivo: criar e capturar valor econômico. ...
Resumo: Eixo Tarun Khanna stitutional Voids, de Spotting Institutional Voids in Emerging Markets, expôs as deficiências dos sistemas institucionais impeditivas do adequado funcionamento dos mercados, por seu impacto negativo no desempenho das organizações, causador de danos socioeconômicos. Ancorado nesta teoria e no objetivo de identificar os Institutional voids structural e contingent cuja interferência no contract enforcement afeta a estruturação e execução das obras públicas pelo setor da Construção Civil brasileiro, resultando em parali- sações e/ou abandono pelo Poder Estatal, este estudo, constituído das abordagens teórica e prática e inserido na vertente quali-quantitativa, atestou tal interferência ao identificar os voids pela classificação taxonômica que norteou o processo da análise estatística dos dados catalogados por programas de financiamento do Estado, oriundos do Banco de Dados do Tribunal de Contas da União (TCU), confirmando, por extensão, as hipóteses propostas: Ho1 – confirmada com 28 ocorrências a presença de fatores ambientais no contexto socioeconômico em tela, promotores dos contingent voids causadores da paralisação das obras, mesmo quando utilizados como recurso de oportunidade de adaptação ou forma de escape; Ho2 – comprovado com 61 ocorrências, que os Contingent voids afetam negativamente o enforcement dos contratos de obras públicas, se presentes nos domínios Normativo, Regulatório e Cultural Cognitivo da instituição contratante; Ho3 – confirmada com 2076 ocorrências, que a presença negativa de Structural voids afeta o enforcement dos contratos de obras públicas, se presentes nos três domínios da instituição contratante; Ho4 – confirmado com 2076 ocorrências de structural voids e 161 ocorrências de contingent voids (+ “motivos/ voids não informados”), que tais institutional voids induzem à paralisação de obras contratadas pelo poder público com empresas privadas; Ho5 – confirmada com 2.237 ocorrências o possível corte dos structural e contingent voids (+ “voids não informados”) presentes nos contratos do poder público com o setor da construção civil, impeditivos do contract enforcement, se presentes em conjuntura favorável ao seu efetivo combate; e Ho6 – a classificação taxonômica dos structural e contingent voids causadores do contract enforcement oferta valioso contributo teórico e prático, por permitir o efetivo combate das quebras contratuais na relação Estado versus Construção Civil, geradoras das presentes 4.681 obras paralisadas, ao expor os fatores estruturais e contingenciais de sua relação com os pilares Normativo, Regulatório e Cultural Cognitivo, em procedimento indicativo das causas das paralisações oriundas da relação comercial. Concluiu-se, pois, que do confronto: Structural e Contingent Voids versus pilares institucionais Normatização, Regulação e Cultura Cognitiva, emergeo combate efetivo aos agentes paralisadores das obras públicas, resultado facultado pela identificação dos voids bloqueadores do Contract enforcement. Palavras-chave: Institutional voids. Structural voids. Contingent voids, construção civil. Obras públicas.
... By doing so, they not only enjoy greater financial flexibility, but also reserve internal funds for unlisted peers that lack alternative sources of capital. Indeed, previous studies demonstrate that the value of internal capital market to group affiliates decreases in the presence of developed external capital markets (Chang et al., 2006; Khanna and Palepu, 2000). Due to their access to external capital markets, listed affiliates are likely to benefit to a lesser extent from the financial coordination of centralized equity ties than unlisted peers. ...
Research summary: Although prior research has suggested that equity ties are important for business groups, less attention has been paid to the specific mechanisms through which equity ties create value. We develop a framework that specifies how centralization of intragroup equity ties affects the performance of group affiliates. We use the exogenous shock of the 2008 financial crisis and a difference-in-differences analysis of 51,730 observations of business group affiliates in Taiwan to show that centralization of equity ties enhances affiliate performance, but such effects weaken when the environment becomes turbulent. Moreover, we find that listed affiliates obtain fewer benefits from centralization than unlisted affiliates. Overall, our study deepens scholarly understanding of not only how groups create value, but also how value is differentially appropriated among affiliates.
Managerial summary: Our research speaks directly to owner-managers of business groups with respect to creating an optimal equity network structure that binds the affiliated firms of the group. Our findings suggest to managers that the overall structure of equity ties in a business group has major implications for the performance of the affiliate firms of the group, and the network structure within the group should be designed deliberately and thoughtfully on an on-going basis.
In particular, control through centralized equity ties is performance-enhancing in normal periods, but such control may be counterproductive as turbulence increases in business environments, or as the number of listed group firms increases. Hence, owner-managers may consider optimizing the network structure by lowering the degree of centralized equity ties under such circumstances, or at a minimum, lowering centralized control.
... However, institutional voids can also provide opportunities (Khanna and Palepu, 2000, 2006, 2010Mair et al., 2012;Doh et al., 2017), which can be turned into advantages if properly addressed and exploited. There are several reasons to assume that emerging economy firms can reap significant benefits from institutional inefficiencies, provided that they leverage them appropriately. ...
Building on the institutional economics perspective, we study how local firms in an emerging economy exploit institutional voids by sourcing inputs from industries with a large informal economy. We argue that this allows them to build a cost-related competitive advantage and leverage it both to export and to enhance export performance. The empirical study uses a unique dataset compiled by the Mexican authorities covering manufacturing plants between 2005 and 2012. Our results indicate that firms operating in industries that procure from industries with an extensive informal economy are more likely to export and to have better export performance.
... Relational capital is particularly important for firms where institutions are under-developed (institutional voids), such as is typical of emerging markets (Khanna and Palepu, 2000). Relationship-oriented motivations often govern internationalization decisions more than marketoriented motivations (Johanson and Vahlne, 2003;Puthusserry, Child and Khan, 2020). ...
Prior research suggests that corporate boards and directors play important roles in firm strategy and performance. In this paper, we examine an important yet under‐explored avenue and focus on their role in overcoming the multilevel psychic distance (PD) faced by internationalizing small and medium‐sized enterprises (SMEs) originating from an emerging market. Analysing Indian Fintech SMEs, using multiple case studies, our findings reveal that boards contribute important network‐level resources and knowledge about foreign markets, which in turn assists internationalizing SMEs in mitigating PD. We demonstrate that the human and social capital of boards play important, yet distinctly different, roles in mitigating PD at pre‐ and post‐internationalization phases. At the pre‐internationalization phase, directors’ prior international and industry experience, as well as board interlocks and prior connections, are most valuable, whereas at the post‐entry phase, transnational boards, and those with stronger trust‐based personal relationships (i.e. greater depth of social capital, facilitate faster experiential learning. Taken together, our findings contribute novel insights into the mechanisms through which boards affect the outcomes of firms operating, and originating from, extreme institutional environments. Further, we draw implications for research and practice.
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This article aims to analyse decisions about international entry modes from the stakeholder perspective, delving into different configurations of governance modes. A quantitative analysis is employed using data on 463 observations of Brazilian companies operating in foreign markets. We find that business group affiliation, support from institutional partners, and the characteristics of host market networks all influence company decisions to adopt lower control modes in international markets. The article contributes to international entry mode and franchising literature by applying stakeholder theory to choices about foreign entry modes. It shifts the focus away from the profit- and cost-related aspects of rational choice models towards recognizing the substantial impact of stakeholders, enriching our comprehension of this complex decision-making process. Our study further offers a more nuanced understanding of mode choice by investigating modes of international franchise governance with varying levels of commitment, control, and risk.
We examine the effect of business groups on corporate bond costs. Using a sample of corporate bonds issued by Chinese privately owned firms from 2007 to 2019, we show that business group-affiliated firms issue bonds at higher yield spreads than independent firms. The results hold after addressing the endogeneity issues of self-selection, selection bias, and financing decisions. We do not find that corporate governance plays a role in mitigating the negative impact of business groups on bond costs. Business groups negatively affect bond costs through tunneling and risk spillover channels, whereas financing advantage is not a transmission channel.
Business groups are observed everywhere except in the U.S. and U.K.; their global presence is widely acknowledged. The most successful explanation for this preponderance has been based on the relative efficiency of business groups’ internal market vis-à-vis the external market conventionally observed in underdeveloped or emerging economies. Unsurprisingly, this view cannot explain why business groups also prosper in advanced economies where their internal market is thought to no longer match efficient external markets. This study addresses this contradiction by drawing attention to non-tradable, intangible assets and putting forward an institution-free, micro-level explanation. Specifically, we reason that the external market for organizational capabilities is bound to be missing regardless of institutional advancements and economic development due to human beings’ innate cognitive limits and information and behavioral uncertainties, while business groups’ internal markets may overcome these limits via their distinctive organizing mechanism underpinned by group identity, solidarity, mutual trust, shared organizational architecture, and enhanced communicability. In other words, business groups can outperform the external market in coordinating and facilitating exchanges of non-tradable assets and organizational capabilities in particular that are becoming increasingly crucial for successful competition. Using panel data of large business groups in Korea during the periods between 2003 and 2016, we confirm that affiliation with business groups and accessing their internal market enhances technological capability. Thus, this study extends our understanding of business groups beyond the institution-based explanation.
This editorial introduces the literature on informal institutions and international business (IB) as well as the Special Issue. Informal institutions serve as the invisible threads that connect the fabric of social groupings, making them a critical element in the study of IB, but also especially challenging to capture both theoretically and empirically. As a result, there has been limited work on the topic, a lack of clarity on how to conceptualize and measure informal institutions, and a limited understanding of the role they play in IB. This editorial and Special Issue seek to address these gaps. Specifically, this editorial teases out the definitions of institutions, formal institutions, and informal institutions, and clarifies how they differ from organizations and culture. It then reviews the literature on the three main institutional traditions, explaining for each the role of informal institutions, and connecting them to the IB literature and Special Issue articles. Finally, it identifies gaps and proposes a future research agenda. The goal is to stimulate the academic conversation on the topic by showing how informal institutions are essential in studying international business.
Extant literature suggests that family firms, due to their desire to retain family control, have a lower propensity to diversify than non-family firms. Contrarily, family business groups (FBGs), especially Asian FBGs, are widely diversified. It was anticipated that FBGs would become more focused during reforms in developing economies. However, these FBGs did not only maintain their diversified portfolio of businesses but also enter newly deregulated sectors during reforms. This paper draws insights from transaction cost theory and knowledge governance literature to investigate this paradox. This paper argues that the family-based governance mechanisms of FBGs can efficiently manage their diversified portfolio by avoiding the “negatives” associated with market-based exchanges and creating “positives” by efficient knowledge sharing among affiliates. Thus, diversification strategies allowed Indian FBGs to create value and preserve the socioemotional and psychic wealth that comes from owning various businesses.
Corruptive practices refer to the abuse of power for private benefits, and include a wide range of hidden, unethical conduct at both the individual and organisational levels. This study focuses on an institutional mechanism that thwarts corrupt practices and improves corporate governance. We examine how the adoption of an international reporting standard, IFRS, impacts transparency when key players such as multinational corporations (MNCs) and global audit firms (Big 4, Big 5, and Big 6) make the transition to an international digital system of information disclosure. These findings support an emerging body of literature that underlines the relevance of international institutional mechanisms as a pragmatic approach to improving corporate governance designed to protect stakeholder interests.
Informal institutions influence all aspects of international business (IB), but they have received limited attention in the literature relative to formal institutions. This article extends prior IB work by examining the relationships between several key formal and informal institutional factors and the international strategy of MNEs. First, it examines the direct effects of formal and informal institutional effectiveness, convergence, and distance on MNE local adaptation, developing arguments and propositions for each relationship. Second, it focuses on the interactions of formal and informal institutional effectiveness and convergence to develop an eight-fold typology of market institutional configurations. This typology depicts the role that informal institutions take in a market depending on the interaction of these three institutional factors. Third, it builds on these interactions and the concept of institutional distance to develop a conceptual framework of market and MNE institutional diversity and dynamism. This framework captures the formal and informal institutional relationships within a home market, host market, parent firm, and foreign subsidiary, as well as the formal and informal institutional relationships across each of these entities over time. In so doing, this article helps advance research on informal institutions and IB, which can lead to considerable future work on the topic.
We examined how entrepreneurial support, resource securement, and coopetition affect the performance of SMEs in the turbulent context of an emerging economy. Data collected from a survey of SMEs in Bolivia generated an unusual finding: coopetition strategy has no significant impact on performance.
Owing to privatization and divestment, State Owned Enterprises (SOEs) in many emerging markets are evolving in their form and function. SOEs, increasingly, are hybrid organizations, where the state is one of the owners along with other ownership groups such as institutional investors. Combining the resource-based view and institutional perspectives, we argue that the different ownership groups within the SOE can be instrumental in promoting/deterring the internationalization efforts of SOE. Empirical results from a sample of 1310 firm year observations of 116 unique firms within a 2011–2019 time-period demonstrate that state and foreign institutional ownership impact SOE internationalization negatively whereas domestic institutional ownership has a positive impact on SOE internationalization. Additionally, we examine interactions between different hybrid ownership groups and find that both foreign and domestic institutional investors can offer resource advantages to enable state owners to invest in internationalization activities. This study contributes towards a deeper understanding of ownership hybridity, internationalization challenges and resource mobilization in SOEs from emerging markets.
Research Summary
We examine how managers' political power reallocates resources in the internal capital market. By shifting the focus from financial to firm‐specific, non‐financial resources that are difficult to evaluate and zero‐sum in nature, we revise the prevailing view that managers' political power plays a significant yet contingent role under financial constraint and weak governance. We instead characterize managerial political power as an intrinsic, inescapable determinant of internal competition and resource allocation. Our research design links sentence‐by‐sentence, qualitative analyses of the legal opinion delivered as breaking news during the corruption trials involving a key executive at Samsung group with minute‐level shifts in share prices. This study presents a politics‐based theory of the internal capital market and highlights the methodological potential of quantitative case studies.
Managerial Summary
Managerial politics presents a vexing yet persistent reality of organizational life and the inter‐divisional competition for resources. We attribute its pervasiveness to the contest over non‐financial resources with fuzzy ownership and significant yet uncertain value, such as bargaining power over internal transfer pricing, managerial attention, and control over new business opportunities. Because of the zero‐sum dynamics of these non‐financial resources and their constant scarcity, political contests cannot be suppressed through the provision of financial slack or agency controls and even extend to family members. Appointing rival managers along clearly separated lines of businesses may curb, but not eliminate, managerial politics. We show that investors are acutely aware of the value of managers' political power and make investment decisions based on them.
The international business literature, while extensive by now, has given scant attention to the direct comparison of the performance of advanced economy multinational enterprises (AMNEs) and emerging market multinational enterprises (EMNEs) in international markets. In particular, the question of how well these firms perform in each other's home markets is an intriguing one. In this study, we examine "market share" performance of AMNEs and EMNEs in each other's countries using a comprehensive, longitudinal dataset. Drawing from the eclectic paradigm , we contend that, in comparison, EMNEs perform better as they: i) develop non-traditional ownership advantages based on their learnings in their home markets, and ii) expand into advanced economy markets relying on non-traditional ownership advantages. Our findings show a declining performance of AMNEs operating in emerging markets over time, while EMNEs generally appear to benefit from increased market shares in advanced economy markets for the same period.
We investigate how emerging market multinationals (EMNEs) choose locations for foreign direct investment (FDI) and how they determine the scale of FDI in host countries where formal institutions are more developed or less than their home country. Integrating internalization theory with the directionality logic of institutional distance, we develop theoretical arguments of cost-effectiveness related to FDI location and FDI scale in two institutional directions: host countries with more developed institutions than the home country and those with less developed institutions. We hypothesize that an EMNE’s likelihood of investing in the positive (negative) direction decreases (increases) with the increase in home–host institutional distance, but the investment scale increases (decreases) with increasing institutional distance. The FDI location choice varies among EMNEs with different levels of intangible assets, but the FDI scale does not. Our analyses of 3,297 EMNEs’ outward FDI in 100 host countries between 2004 and 2019 provide supportive evidence. This study extends internalization theory using EMNE-specific evidence of directional distance between home- and host-country institutions.
This paper uses an in-depth qualitative case study of a family-owned emerging market multinational enterprise (EMMNE), specializing in digital and electronic media, to explore how EMMNEs can potentially leverage their technological, cultural, and relational capabilities to deliver superior business and relationship quality outcomes for its clients. An in-depth analysis reveals how this EMMNE transformed its business model. Furthermore, building on a firm’s resource-based view (RBV), specifically, dynamic capabilities, this research examines how this EMMNE leveraged its cultural and relational capabilities and created a social and values-based context through HRM practices suited for its contextual conditions. Such a context and organizational capabilities collectively enabled business model innovation to deliver sustained value to its clients domestically and in other emerging markets. We discuss our findings and conclude with implications for theory and practice.
The literature has tended to overlook the great divergence in the competitive dynamics of firms in emerging economies. Drawing on the strategic competitive dynamics literature and prospect theory, this article aims to deepen our understanding of the competitive dynamics among firms in emerging economies and how the dissatisfaction of dominated firms with their domestic position affect foreign subsidiary exit time. Using hazard models with an accelerated failure time (AFT) specification, we investigate the impact of a firm’s domestic market position on subsidiary exit time using a longitudinal sample of 6,651 subsidiary-year observations and 735 subsidiary exits of 296 South Korean parent firms with international operations in 64 countries over a 27-year span (1990–2016). The empirical results suggest that the domestic market position affects the risk-taking orientation of dominated firms and plays a critical role in the internationalization of firms in emerging economies. Specifically, dominated firms, compared to dominant firms, have some advantages when investing abroad, notably in less-developed countries.
The growing worry about changing climatic circumstances, the COVID-19 economic crisis, and the management and conservation of biological resources necessitates the development of appropriate models for the long-term management of mining resources, as well as the regulation of extractivism at the Latin American level and its massive effects on the environment and communities. The major goal of this paper is to evaluate the influence of the mining conflict on the scholar. This study analyzed the Latin American mining sector and its recent evolution in the socio-ecological conflicts issues. The research was conducted through a bibliometric analysis in Scopus database from 1991 to 2020. The period with the highest concentration of publications was from 2013 to 2020, and the countries with the most substantial number of publications are Colombia and the USA. Our article concludes that mining conflicts are causing increasing worry among scholar, and their management has significant potential to address the issues of protecting the environment and communities while avoiding the crisis and its consequences in Latin America.
The widespread emergence of digital firms has important implications for international business theory. In this paper, we argue that because of systematic cross-industry differences in the local ecosystems digital firms need to develop in foreign markets, they will face differential costs and challenges of what we term liability of ecosystem integration (LoEI). The nature of the LoEI differs from both traditional concepts of the liability of foreignness (LoF) and the liability of outsidership (LoO). Rather than reflecting the need to overcome economic or psychic distance by learning about the host country (as with LoF) or investing in relationship-specific knowledge (as with LoO), overcoming LoEI requires investments in catalysing the co-development of a local ecosystem involving users, complementors and institutional actors specific to each business. We show how the level of LoEI a firm faces depends on the characteristics of its industry and its business model along three dimensions: the level of integration with local users, complementors, and institutions. These characteristics impact both firm's success in internationalisation and the level of concentration in the global market.
While a number of studies have examined ownership structure across countries, the literature has not yet reached a consensus as to how and why ownership concentration and size sensitivity of ownership concentration varies across countries. Using a sample of 18,932 firms across 40 countries, we find that there is a negative relationship between firm size and ownership concentration and thus lower ownership concentration in countries with a high quality of governance. Meanwhile, in countries with weak governance, ownership concentration persists even as firms get larger. Our findings support the theory that a firm’s choice of optimal ownership structure depends on its quality of governance, which includes both vertical and horizontal governance. Our study also finds that civic capital, including ethical values contribute to the variation of ownership structure across countries. The findings also potentially reconcile the currently conflicting empirical results in studies of ownership concentration around the world.
This paper examines the performance of group affiliate firms vis-à-vis non-affiliated firms during three distinct macroeconomic periods in a post-reform institutional environment of an emerging economy. The investigation provides evidence that non-affiliated firms perform better than firms affiliated to highly- and moderately diversified groups as per profitability efficiency scores. However, firms affiliated to highly diversified groups perform better as per their marketability efficiency scores. Performance is gauged as per the Farrell efficiency measures using the non-parametric data envelopment analysis (DEA) method. The two efficiency measures considered here are profitability efficiency and marketability efficiency. In most of the past studies on performance comparison of group affiliated and non-affiliated firms, performance evaluation of firm has been problematic as it is based on only one indicator. This is the first study in this line of inquiry to have used DEA, which reconciles multiple inputs and multiple outputs to provide a summary measure for performance assessment.
Startups in the Brazilian organizational scenario have been growing fast and understanding these startups' internationalization strategies have been highly relevant. Such startups have developed a social, environmental, and economic impact solution that had the support of government programs in its internationalization process, seeking to understand the impact of these programs. This article has sought the following: (1) identify the risks and critical success factors in the internationalization process of born global startups of industry 4.0, (2) analyze the social, environmental, and economic aspects. The authors have based the methodology on a single-case analysis, a global startup - Asel-Tech, a technology and automation company focused on developing and providing solutions for leak detection in oil pipelines and derivatives. Among the main results, we highlight: (1) the proposition of a model for risk and critical success factors analysis in the internationalization of born global startups of industry 4.0, (2) the analysis from the institutional view perspective on the strategy, on the social, environmental, and economic aspects of digital manufacturing. For professionals, the article provides a model to assist startups in future internationalization processes.
We investigate the relationship between multinational enterprise parent-subsidiary governance (MNEPSG), host country governance quality (HCGQ), and foreign subsidiary survival. We draw upon agency theory, MNEPSG literature, and institutional theory to develop a holistic conceptual model. We test our hypotheses using a large longitudinal sample of 1,711 MNEs and 13,398 subsidiaries in 63 countries from 1990-2013. We find that key MNEPSG mechanisms (Ownership, Expatriates, and Regional Headquarters) positively impact foreign subsidiary survival, whereas HCGQ negatively impacts it; and that increasing Ownership and Expatriates is more effective in high HCGQ contexts. We discuss important implications for research and practice.
Institutional intermediaries are often seen by governments as avenues for increasing firm level innovativeness. This is because they can provide both information and legitimacy, which enable access to government support. Yet, close engagement with intermediaries may also encourage political intervention, especially in the context of emerging markets. Using a unique dataset which consists of the Chinese Micro- and Small- Enterprise Survey (CMES) and the National Economic Research Institute (NERI), we explore the roles of government support and political intervention in the relationship between institutional linkages and firm innovativeness. We find that government support, in the form of tax benefits, and political intervention mediate the relationship between institutional linkages and firm innovativeness. We also find that this relationship is contingent upon the degree of institutional development within which firms operate. Our findings therefore contribute to the burgeoning literature that examines the effects of institutional intermediaries on innovation by exploring both their bright and dark sides. We discuss the implications of these findings for institutional intermediary research, institutional theory and innovation literature and offer advice to policymakers and managers looking at improving innovativeness.
Management researchers rely frequently on theoretical perspectives originating in North American and European contexts. Given the influences context has on scholarship, the question becomes if using primarily Western theories provides researchers with the design insights needed to capture the robust context of the setting in which they conduct their studies. Herein, we seek to establish a foundation for developing fertile exchanges of ideas regarding contextualized management research. To do this, we examine some of the main theories in management studies through the heuristic lens of an “open systems” framework that allows us to build on comparative management and institutional theories. We discuss existing theory advances in selected areas of management studies, including corporate governance, strategic management, entrepreneurship, and corporate social responsibility (CSR) to offer avenues for future research. Completing studies with a solid grounding in contextualized management theories has the potential to provide novel research avenues and opportunities to integrate diverse theoretical perspectives. We also identify a need for multidisciplinary research, epistemological openness, and methodological pluralism.
China’s position as one of the most powerful nations in the world is undisputed. However, in an evolving landscape, China’s utilisation of a path-dependent business system may hinder the ability of the country’s institutions to undergo necessary change, which will have important implications for international business literature. Through business system theory, empirical evidence and a mixed methods approach, we discuss China’s business system explaining how the system may impair sustainable growth and the transformation required by a less dependent industrial society. Our research suggests that the Chinese business system is still very arrested due to its recent past, and the Chinese Communist Party has only partial interest in improving some of the most important bases for the development of modern enterprises, even if fostering a somewhat liberal economic approach. Since similar political (authoritarian) and economic (liberal) approaches are found elsewhere, we theorise on what we called an authoriliberal economic approach.
The current research, leveraging the upper echelons' theory, examines the association between CEO narcissism and firms' myopic management. The study further examines the underlying mediating effect of market orientation in this linkage. Finally, the study examines the moderating effect of the output-oriented board of directors on the indirect effect of CEO narcissism on myopic management, i.e., a moderated-mediation analysis. Data on a sample of 210 Indian firms from 2009 to 2016 suggest that CEO narcissism positively influences the firm's myopic management. Furthermore, market orientation partially mediates the influence of CEO narcissism on myopic management, such that CEO narcissism lowers market orientation. The lesser the market orientation more is myopic management. However, as the output orientation of the board of directors increases, the indirect positive effect of narcissism on myopic management is decreased. Our study shines a light on the antecedents of myopic management and its role as a mediator under the contingency effect of demographics of the board of directors, i.e., the marketing board of directors.
Mobile money is a widespread innovation throughout emerging countries. Since neither country-level institutions nor firm-level factors alone offer satisfactory explanations for mobile money's success, we draw on institutional theory to uncover how firms interact with institutions in target markets and explain the adoption of mobile money services. We perform a fuzzy-set qualitative comparative analysis on 110 mobile money services from 46 emerging countries revealing four recipes for widespread adoption. In configuration 1, providers with high market power reach high adoption–irrespective of enabling institutions–if institutional voids are large. However, configurations 2 and 3 suggest that in most cases either enabling regulation or sufficient mobile and educational infrastructure are key for successful adoption. In these three configurations, providers are part of multinational telecommunication firms operating in markets with financial market voids. Configuration 4 suggests that certain fintech firms reach high adoption rates in more developed financial services sectors because they offer a broad scope of services. We highlight the usefulness of a configurational lens for institutional theory to understand phenomena at the intersection of innovation, society, and business – especially in emerging markets with complex institutional settings.
It is assumed in the international entrepreneurship and international business literatures that firms entering overseas markets possess attributes that are unique and valuable, providing them with an advantage that offsets their liability of foreignness. There is a further assumption that the market knowledge acquired through exporting is independent of export destination. We challenge these two assumptions in a longitudinal study of Vietnamese new venture firms. We report that innovation in these firms is ex-post exporting and not ex-ante as expected. The Vietnamese firms in our study that engage in exporting as international suppliers into global value chains show evidence of process innovation after exporting, but not of product innovation. We also report that exporting to advanced economies enhances process innovation, but that firms exporting to emerging economies neither innovate their processes nor products.
Leveraging the human capital specificity and the Chief Executive Officer (CEO)–top management team (TMT) interface literature, this study explores the impact of generalist versus specialist CEOs on R&D commitments by Indian firms under the boundary conditions of TMTs' functional and educational diversity. Based on a sample of 253 firms over a period of 6 years, in contrast to previous studies, our findings suggest that specialist CEOs are more likely to invest in R&D than generalist CEOs; however, when supported by functionally and educationally diverse TMT, the R&D commitment of generalist CEOs increases as well.
Research Summary
Institutional changes create entrepreneurial opportunities and entrepreneurs strategically respond to institutional pressure. However, we lack an understanding of how institutional changes impact entrepreneurial strategies. By exploiting the regional disparities in China's economic transition, we examine how institutional changes alter the effects of entrepreneurial strategies. Using data from an alumni survey in China, we find that relationship‐based strategies are positively associated with firm size in the early stage, innovation‐based strategies appear more effective in the late stage, and “cocoon‐based” strategies are associated with larger firm size in the intermediate stage of institutional change. We propose that entrepreneurs may temporarily leverage “cocoon institutions” to buffer uncertainty in the broader institutional environment. Overall, we contribute to research at the intersection of institutional change and entrepreneurial strategies.
Managerial Summary
Institutional environments influence the effectiveness of entrepreneurial strategies. How should entrepreneurs adopt different strategies at different stages of an institutional change? We tackle this question by examining China's transition from a planned economy to a market economy. Using data from an alumni survey in China, we find that relationship‐based strategies promote firm growth in the early stage, innovation‐based strategies appear more effective in the late stage and locating in science parks benefit firm growth in intermediate stages. Overall, our study implies that entrepreneurs should adopt different strategies to fit different types of institutional environments. Also, our study provides implications to policymakers that cocoon institutions, such as science parks, may be temporarily effective during the intermediate stage of an institutional change.
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The viability of unrelated diversification as a strategy in emerging economies is an unresolved puzzle. Because business groups dominate the landscape in these economies, and are known to diversify either by expanding the scope of existing affiliate firms and/or setting up new firms, we argue that it is important to make a distinction between firm-level and business group-level diversification. The results of our study covering the 15-year period following India's economic liberalization confirm our thesis. Whereas all firms, including business group affiliates, reduced unrelated scope to negotiate product and capital market pressures, business groups took advantage of the opportunity-rich, post-reform environment to enter into new unrelated businesses by setting up new affiliates. Our findings echo suggestions that as institutions strengthen, the locus of unrelated diversification moves away from managers of public corporations to entities with different types of ownership structures. We present the business group as one such ownership structure.
Research Question/Issue
Despite the importance of political ties to firm strategy and performance, little is known about why and how firms form political ties. This study examines how firm‐specific governance structures function as important determinants of the formation of political ties and how the impact of governance structures evolves during institutional transition of emerging economies.
Research Findings/Insights
Our empirical analysis is based on a longitudinal data set involving manually coded political ties of listed firms in Taiwan between 1996 and 2005. We find that business group affiliation and family ownership facilitate the formation of political ties but that such effects diminish as market infrastructures and regulatory institutions develop.
Theoretical/Academic Implications
This study systematically examines how corporate governance structures affect the formation of political ties. It identifies an overlooked explanation for the dynamics of political ties that resides in the internal governance structures of firms. It contributes to the corporate governance research by demonstrating how governance structures other than the board of directors can provide resources to facilitate strategic actions such as political tie establishment. It also enriches research on corporate governance bundles by showing the interdependence among multilevel governance mechanisms in the context of political tie formation.
Practitioner/Policy Implications
This study offers insights for business executives interested in managing interdependence with government. While business group affiliates and family firms are better able to link to politicians, such advantages diminish during institutional transition. Hence, group leaders and family owners should consider other political activities to effectively manage political risks as institutions develop.
Venture capital (VC) markets are essential for the development of high-growth entrepreneurship. Previous studies have discussed the importance of formal institutions and regulations in the creation of VC markets. However, the role played by informal institutions--and how they interact with formal institutions--is still puzzling. To disentangle this issue, we performed a 26-year analysis of the case of Chile, an emerging market where formal institutions and regulations had long been in place but a VC market failed to emerge. Based on our findings, we develop a theoretical framework where we propose that (1) the presence of strong formal regulatory institutions that support VC markets is a necessary but not sufficient condition for the emergence of a robust level of VC activity, and (2) informal institutions that legitimate high-growth entrepreneurship are a necessary antecedent to the availability of high-growth entrepreneurs and, therefore, to the emergence of a robust level of VC activity.
Research summary
Anticipating that innovation nurtures entrepreneurship, we began an extended case study of an innovative start‐up in the space industry. We quickly saw that institutions imposed formidable barriers to implementing entrepreneurship from innovation. Curious about how, why and the extent of this situation, we widened our study to other start‐ups, CEOs of existing businesses, an incubator, a technology transfer office and key influencers in large space companies and agencies. We found that institutions and policies had, in effect, shrunk the entrepreneurial field, leaving little room for enterprise. Conceptualizing from this, we propose the institutions create an “entrepreneurial space.” Theoretically, we explain how this concept of an entrepreneurial space can be usefully applied in other contexts.
Managerial summary
The space industry is extremely innovative. It is also dominated by two powerful incumbent firms and a third that is highly regulated. This research examines how entrepreneurship in the space industry is shaped by institutions, and what this implies for the freedom to be entrepreneurial. We investigate this question in the French European context. We find that while the industrial context and institutions had completely pushed entrepreneurship out of the upstream segments it flourished in the margins of this industry. The upstream segment is not at all entrepreneurial; downstream is the entrepreneurial milieu of the space industry. We recommend that policymakers (1) strengthen private‐public‐partnership arrangements; (2) implement policies to attract venture capitalists to transform and reinvigorate the upstream segment; and (3) design specific incubation mechanisms for space start‐ups.
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Drawing upon the literature on organizational imprinting, we examine how a firm’s history impacts its performance in subsequent periods. By considering the emerging market context of India, we present evidence that the degree of imprinting of the pre-liberalization era is negatively related to the persistence of superior performance in the post-liberalization period. Furthermore, we investigate the role of imprinting attenuators and find that a firm’s listing status, international exposure, and knowledge spillovers from foreign firms weaken this baseline relationship. Empirical results based on a large unbalanced panel data set of 18,201 firm-year observations of Indian firms during the period 1991–2005 provide robust support for our conceptual model. Complementing the growing literature on the impact of contemporaneous institutional changes on performance, this study sheds light on the important role of the institutional history of firms from emerging economies.
Empirical research concerning business groups has documented the effects of group size and diversification on group-level performance. We argue that these effects are contingent on the group affiliation structure and occur through the following two mechanisms: connectedness and risk-sharing. We tested for moderation effects in a panel dataset of 127 pyramidal business groups in Brazil during the period from 2001 to 2015. We found that while the number of corporate layers in the pyramidal ownership structure positively moderates the effect of size on group-level performance, the concentration of affiliates in the first layer shows a negative moderation. We also demonstrated that limited diversification in the first corporate layer reduces the effect of size on group-level performance.
Family firms often face trade-offs between economic and non-economic objectives when making decisions on the pollution prevention strategy, one type of proactive environmental strategy. Existing evidence from developed economies has largely shown a positive relationship between family firms and pollution prevention strategy, but little research has investigated whether there is a positive relationship in emerging economies as well. This research adopts agency and institutional theories to examine the impact of family firms on pollution prevention strategy in the context of China. We analyzed a sample of 2348 Chinese firms using ordinal least squares regression. Empirical results show that family firms underinvest in pollution prevention strategy relative to non-family firms, particularly when the Chief Executive Officer (CEO) is not the firm’s founder. Moreover, different types of institutional factors alter the effect in different ways. Regulatory pressure weakens the negative effect of family ownership on pollution prevention strategy, whereas institutional support strengthens this main effect. These findings enrich the understanding of why and under what conditions family firms perform pollution prevention strategy.
A widely accepted account of business group (BG) functioning suggests that this common corporate form will dismantle and restructure with the progressive maturity of market-supporting institutions. However, even in mature institutional settings, BGs appear to persists and thrive. We hypothesize that BG persistence arises from an evolving competitive advantage because their competitive advantages with certain types of management practices do not decay with institutional development. We test our hypothesis with data assembled in the World Bank Enterprise Surveys (WBES). Empirical results show that several bundles of management practice differentiate BG affiliates and independent firms in the early phase of development but become less prominent at later stages. However, some of the differences in management practice bundles disappear, but others continue to differentiate independent firms and group affiliates in mature institutional jurisdictions.
We explore the mechanisms through which subnational informal institutions exacerbate or ameliorate voids in national formal institutions. Informed by a within-country, cross-sub-region case comparison, we find two exacerbating mechanisms: Competition between the logics embedded in national and subnational institutions and the sabotage of a formal national institution by a void in a subnational informal institution. We also find two ameliorating mechanisms: Strong subnational informal institutions substitute for weak national institutions and bridge voids in formal institutions. Finally, we identify the conditions of expectation alignment and engagement associated with the competition, sabotage, substitution, and bridging mechanisms. Our findings contribute to institutional theory by providing a more subtle and contingent understanding of the interaction between informal and formal, and subnational and national, institutions. Our results also suggest ways in which constrained managers and bureaucrats can reduce the effects of voids in national formal institutions.
This study examines the impact of foreign controlling shareholder trust on firm market risk using the two measures of total and idiosyncratic risk. An extensive global sample of 12,496 firm-year observations from 43 countries is employed. The results show that firms controlled by foreign trusting shareholders display lower levels of risk in both market measures. Trust appears more important for firms based in countries with a less favourable institutional environment, whereby it varies with the investment horizon of foreign controlling shareholders. The results are robust after controlling for cultural measures, endogeneity, selection bias and alternative model specifications.
This paper examines the emergence of digital entrepreneurship in the context of emerging economies. Given that these economies generally lack a well-developed institutional framework, we draw on the concept of institutional voids as our theoretical lens. We argue that digital entrepreneurship facilitates the navigation and bridging of socio-cultural institutional voids but also provides opportunities for entrepreneurs to directly and indirectly alter the existing institutional context. We illustrate these arguments by drawing upon six biographical narrations of female digital entrepreneurs in Saudi Arabia. Accordingly, through our development of a multi-level model, we make explicit the two-way causal interaction between entrepreneurial action, institution altering behaviour and the social and cultural context, thus providing a framework for future research.
This study examines emerging economy business groups’ growth directions during institutional change. Building on Penrose’s Theory of Growth of the Firm, we explore managerial resources as foundations for growth. Specifically, we argue that their growth directions are critically shaped by the nature of managerial experience of business groups. Experience that is context-embedded supports growth within the existing strategic paradigm, whereas context-bridging experience enables international growth. We test hypotheses derived from this theoretical argument for business groups in Taiwan, and find empirical support for our arguments.
Advanced economy multinational enterprises (AMNEs) face idiosyncratic challenges related to the governance of their sustainability practices in their emerging market supply chains. One way for AMNEs to address these challenges would be by adopting agile sustainability governance mechanisms. Drawing on the theories of experimentalist governance and deliberation, we propose a processual framework suited to develop agile sustainability governance mechanisms. We explore the challenges to supplier participation and the factors that enable an authentic dialogue in the process. We contribute to the scholarship on transnational governance and strategic agility, and offer practical implications which are also relevant for disruptions like COVID-19.
In the era of “Industry 4.0”, individualized demand and small batch customization manufacturing will become the trend, which calls for strong capabilities of customer orientation and rapid reaction. In addition to the redesign of smart and autonomous production processes, the market-oriented frugal innovation is a valuable exploration under the framework of “Industry 4.0”. This paper anchors itself at a deprecated policy context to study frugal innovation patterns and their forming mechanisms, which is still a rarely touched area. By selecting as its cases Shifeng, Baoya and Taiqi from the Shandong province, China, this paper uses a qualitative approach to analyze low-speed electric vehicle (EV) businesses according to a three-dimension frugal innovation framework composed by business ecosystem (BE) configurations, BE capabilities and innovation process. The findings are as follows, (1) there are three typical frugal innovation patterns, namely market-based persistence, market-based contingency and technology-based contingency, which help frugal innovators obtain an abundant market performance even under a deprecated policy environment; (2) a vertical integration network and strong marketing capabilities are the capital to select a market-based persistence pattern, while the lack of some substantial resources and capabilities compels firms to have to adopt a more flexible way of frugal innovation in order to carve out a safe niche. This paper contributes to frugal innovation research by exploring a new deprecated policy context rather than traditional institution voids, constructing a frugal innovation framework from the BE perspective by focusing on focal firms, and proposing three frugal innovation patterns under different resource constraints. From the practical side, this paper suggests that future innovation policy should balance advanced technology requirements and practical market demands, and the governments should also emphasize market positioning and demand orientation in the process of Industry 4.0 transformation.
This article reviews the existing literature about the most prevalent form of corporate ownership around the world: ownership by individuals—particularly founders—and families. We summarize the existing evidence about the prevalence and persistence of family ownership around the world, along with its impact on performance—both financial and non-financial—relative to other types of corporate ownership. We discuss how and why these empirical facts and findings come about—why owners in general, and family owners in particular, are critical drivers of firm behaviour and performance, and how they are able to exercise their influence over corporations in which other shareholders, such as institutional investors, and other stakeholders can also play an important role.
This study examines the impact of Korean business groups, chaebols, on the sporting performance of their affiliated professional sports teams using game data from 1983 to 2013. We investigated whether or not chaebol ownership of professional sports teams is more efficient than non-chaebol ownership in achieving athletic success on the field of play. Our empirical evidence found that the chaebol-affiliated teams are more likely to be the league winners or finalists than non-chaebol teams are. We also tested the relationship between the financial crisis in the wider economy that deflates firm resources and athletic outcomes in the affiliated teams. In the tests, which divide the sample period into three 10-year periods, the results of two sub-samples (1983–1993 and 2004–2013) were in line with previous results. We, however, identified an exception when chaebol teams did not play in more final matches of a league between 1994 and 2003, the time interval that includes the period of drastic restructuring of business groups during the 1997 Asian financial crisis.
Evaluating organizations according to an efficiency criterion would make it possible to predict the form organizations will take under certain conditions. Organization theory has not developed such a criterion because it has lacked a conceptual scheme capable of describing organizational efficiency in sufficiently microsopic terms. The transactions cost approach provides such a framework because it allows us to identify the conditions which give rise to the costs of mediating exchanges between individuals: goal incongruence and performance ambiguity. Different combinations of these causes distinguish three basic mechanisms of mediation or control: markets, which are efficient when performance ambiguity is low and goal incongruence is high; bureaucracies, which are efficient when both goal incongruence and performance ambiguity are moderately high; and clans, which are efficient when goal incongruence is low and performance ambiguity is high.
Three theoretical perspectives summarize diversification antecedents and performance outcomes. The first perspective examines diversification under the assumption of relative market perfection where, within industries, firms and products are homogeneous. The second perspective discusses diversification where both market and firm imperfections are assumed to exist. The thirdperspective also assumes market andfirm imperfections, butfurther assumes imperfect governance structures such that managerial motivesfor diversification are influential. These perspectives provide different explanations of antecedent resources and incentives that encourage (or discourage) diversification. This article reviews evidence associated with each perspective concerning the relationship between diversification and firm performance and offers suggestions forfuture research based on comparisons among these alternative perspectives.
This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common law countries generally have the best, and French civil law countries the worst, legal protections of investors, with German and Scandinavian civil law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.
We estimate diversification's effect on firm value by imputing stand-alone values for individual business segments. Comparing the sum of these stand-alone values to the firm's actual value implies a 13% to 15% average value loss from diversification during 1986–1991. The value loss is smaller when the segments of the diversified firm are in the same two-digit SIC code. We find that overinvestment and cross-subsidization contribute to the value loss. The loss is reduced modestly by tax benefits of diversification.
In this paper, the authors show that Tobin's q and firm diversification are negatively related throughout the 1980s. This negative relation holds for different diversification measures and when they control for other known determinants of q. Further, diversified firms have lower q's than comparable portfolios of pure-play firms. Firms that choose to diversify are poor performers relative to firms that do not but there is only weak evidence that they have lower q's than the average firm in their industry. The authors find no evidence supportive of the view that diversification provides firms with a valuable intangible asset. Copyright 1994 by University of Chicago Press.
This paper integrates game-theoretical and sociological concepts to conduct a comparative historical analysis of the relations between culture and institutions. It indicates the importance of culture, and in particular cultural beliefs, in determining institutions, in institutional path dependence, and in forestalling intersociety successful adoption of institutions. Examination of institutional change in two premodern societies from the Muslim and the Latin worlds yields that their distinct institutional structures resemble those found by social psychologists to differentiate contemporary developing and developed economies. This suggests the historical importance of distinct cultures and the related societal organizations in economic development. Copyright 1994 by University of Chicago Press.
According to prevailing theory, firms diversify in response to excess capacity of factors that are subject to market failure. By probing into the heterogeneity of these factors, we develop the corollary that firms that elect to diversify most widely should expect the lowest average rents. An empirical test, with Tobin's q as the measure of rents, is consistent with this theory.
We examine the interaction between three kinds of concentrated owners commonly found in an emerging market: family-run business groups, domestic financial institutions, and foreign financial institutions. Using data from India in the early 1990s, we find evidence that domestic international investors are poor monitors, and that foreign institutional investors are good monitors. Whereas affiliates of those groups that attract foreign institutional investment are no more difficult to monitor than are unaffiliated firms, we find that group affiliation reduces the likelihood of foreign institutional investment. More transparent groups (where greater transparency is proxied for by a lower incidence of intra-group financial transactions) are more likely to attract such investment. We conclude that groups are difficult to monitor, and that foreign institutional investors serve a valuable monitoring function as emerging markets integrate with the global economy.
Explaining cross-country differences in growth rates requires not only an understanding of the link between growth and public
policies, but also an understanding of why countries choose different public policies. This paper shows that ethnic diversity
helps explain cross-country differences in public policies and other economic indicators. In the case of Sub-Saharan Africa,
economic growth is associated with low schooling, political instability, underdeveloped financial systems, distorted foreign
exchange markets, high government deficits, and insufficient infrastructure. Africa's high ethnic fragmentation explains a
significant part of most of these characteristics.
Using a sample of forty-nine countries, the authors show that countries with poorer investor protections, measured by both the character of legal rules and the quality of law enforcement, have smaller and narrower capital markets. These findings apply to both equity and debt markets. In particular, French civil law countries have both the weakest investor protections and the least developed capital markets, especially as compared to common law countries. Coauthors are Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny. Copyright 1997 by American Finance Association.
This paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful
for resolving incentive problems between borrowers and lenders. It presents a characterization of the costs of providing incentives
for delegated monitoring by a financial intermediary. Diversification within an intermediary serves to reduce these costs,
even in a risk neutral economy. The paper presents some more general analysis of the effect of diversification on resolving
incentive problems. In the environment assumed in the model, debt contracts with costly bankruptcy are shown to be optimal.
The analysis has implications for the portfolio structure and capital structure of intermediaries.
Business groups are conceptualized as cross-border mediators, and predicted to proliferate in a country when its international relationship is open in one direction but closed in the other. Data on the 100 largest exporters in Spain, Korea, and Argentina confirm the exacted effects of asymmetrical country development on business groups.
The holding company system arose and remained viable in the Belgian economy because the institution during the decisive interwar years was able to coordinate and to control the supply of external long-term funds to industry, which, due to its historical bias towards the basic industrial sectors, had a relatively high demand for external capital to supplement its modest propensity to generate funds internally. As financial intermediaries, the holding companies continue to hold a strategic position in the accumulation and allocation of savings, but it has been demonstrated above that, theoretically and empirically, the financial intermediation and security substitution organised by such companies does not improve the financial position of the small investor. The economic rationale for the existence of the large holding companies and industrial combines, if any exists, must consequently be sought in the struggle for control over corporate wealth and corporate strategic decision-making. In this chapter we want to present new evidence about this second and more fundamental aspect of the holding companies, the concentration of corporate control. It is the aim of this chapter to measure the control influence of the holding companies at the firm level. The first section develops the methodology for measuring control at the firm level, while in other sections the measuring technique is applied to the Belgian situation.
This paper documents the significant presence of diversified firms in the U.S. economy and presents three views on why firms diversify. The market power view argues that firms diversify to wield conglomerate power across markets. The agency view argues that diversification is undertaken by managers pursuing their own interests at the expense of the firm's owners. The resource view argues that firms diversify in response to excess capacity in productive factors. A review of recent empirical research finds little support for the market-power view and a substantial amount of evidence that is consistent with the agency and resource views.
Greater corporate focus is consistent with shareholder wealth maximization. Diseconomies of scope in the 1980s are confirmed by a trend towards focus or specialization, a positive relation between stock returns and focus increases, and the failure of diversified firms to exploit financial economies of scope (coinsurance of debt or reliance on internal capital markets). Large focused firms were less likely to be subject to hostile takeover attempts than were other firms, but diversified firms were distinguished in the 1980s mostly by being relatively active participants, as both buyers and sellers, in the market for corporate control.
Japan’s economic success since World War II has been striking. Modern Japan was the first major industrial economy to emerge from outside the Western tradition. Economically devastated in 1945, by 1990 Japan had the world’s second largest economy and a GDP per head 20 percent greater than that of the United States. In this paper it is argued that one reason for Japan’s success is that the costs of achieving cooperation and specialization are lower in Japan than in the West. Cooperation and specialization have been acknowledged to have a beneficial impact upon productivity ever since Adam Smith wrote about cooperative specialization in the context of the division of labor. Modern economic theory, however, suggest that in a world of self-interested individuals the costs of achieving cooperation and specialization are substantial. In this paper it is argued that the cultural value system that Japan has inherited from its preindustrial past, and particularly the Tokugawa period, helps facilitate cooperation between individuals and encourages them to undertake productivity-enhancing investments in specialization. This lowers the costs of achieving cooperative specialization. In turn, the lower costs of achieving cooperative specialization have helped Japanese enterprises adopt practices such as self-managing work teams and long-term supplier relations that are consistent with obtaining a productivity-based competitive advantage in the world economy.
This article focuses on the predominance of obligated relational contracting in Japanese business. Consumer goods markets are highly competitive in Japan, but trade in intermediates, by contrast, is for the most part conducted within long-term trading relations in which goodwill give-and-take is expected to temper the pursuit of self-interest. Cultural preferences explain the unusual predominance of these relations in Japan, but they are in fact more common in Western economies than textbooks usually recognize. The growth of relational contracting in labour markets especially is, indeed, at the root of the rigidities supposedly responsible for contemporary stagflation. Japan shows that to sweep away these rigidities and give markets back their pristine vigor is not the only prescription for a cure of stagflation. The Japanese economy more than adequately compensates for the loss of allocative efficiency by achieving high levels of other kinds of efficiency. Relational contracts are just a way of trading off the short term loss involved in sacrificing a price advantage, against the insurance. As for relational contracting between enterprises, there are three things to be said. First, the relative security of such relations encourages investment in supplying firms. Second, the relationships of trust and mutual dependency make more for a rapid flow of information. Third, a by-product of the system is a general emphasis on quality.
This paper argues that the current markets and hierarchies framework of transaction-cost economics provides too limited a set of transactional options to account adequately for many of the organizational problems encountered in developing economies. Focusing on the codification and diffusion of information, it provides a set of concepts designed to extend the existing framework. Applying these concepts to an analysis of the economic reforms in the People's Republic of China since 1978, the paper identifies a form of bureaucratic failure that lies beyond the markets-hierarchies typology and that high-lights the important role played by culture and level of development in shaping transactional preferences.
This paper underscores the importance of hybrid forms in the current market transitions in state socialism through an examination of the emergence of marketized firms and cadre-entrepreneurs in China. The paper develops a new-institutionalist analysis of the organizational dynamics that propel market transition in reforming state socialism. Under conditions of partial reform, marketized firms enjoy a transaction cost advantage over alternative governance structures. Changes in the institutional environment stemming from the spread of markets and the changing structure of property rights, however, increasingly favor private firms. Nonetheless, a mixed economy characterized by a diversity of organizational forms and a plurality of property rights will be a persistent feature of transitions from state socialism. Analysis of the interaction between government, enterprise, and market forces illustrates how the new-institutionalist perspective is applied to a dynamic model of market transition in China.
Several industrial organization studies, using diversification index measures, examined corporate diversification and economic performance and failed to find any significant relationship between them. Rumelt and other strategy researchers used a semisubjective classification scheme and uncovered a systematic relationship between diversification strategies and performance. This study combines the strengths of the index approach, namely, simplicity, objectivity and replicability, with the essential richness of Rumelt's methodology. Using the Jacquemin-Berry entropy measure of diversification and the line-of-business data, this study finds that firms with predominantly related diversification show significantly better profit growth than firms with predominantly unrelated diversification.
When explanatory variable data in a regression model are drawn from a population with grouped structure, the regression errors are often correlated within groups. Error component and random coefficient regression models are considered as models of the intraclass correlation. This paper analyzes several empirical examples to investigate the applicability of random effects models and the consequences of inappropriately using ordinary least squares (OLS) estimation in the presence of random group effects. The principal findings are that the assumption of independent errors is usually incorrect and the unadjusted OLS standard errors often have a substantial downward bias, suggesting a considerable danger of spurious regression.
The purpose of this paper is to examine the nature and significance of the interfirm relationship called the business group. First, the nature of the Japanese business group is discussed. It is then pointed out that the business group is not a phenomenon unique to Japan, and an effort is made to explain the significance of the business group in the context of a market economy, using the Williamsonian approach to questions of internal organization and the market. Finally, the relationship between the input-output relationship of the firms and their group affiliation is tested.
In this paper, we examine the respective roles of efficiency and of market power considerations in explaining why industrial groups are the predominant form of organization in specific industries. Our econometric analysis of French industrial groups suggests that administrative and organizational efficiency is an adequate explanation for the existence of these groups and that rivalry between groups differently integrated and diversified is more likely to be the case than collusion.
This paper examines elements of an efficiency-based theory of the multiproduct firm. The theoretical framework developed by Williamson to explain vertical integration is extended to explain diversification. The proposition is advanced that a cost function displaying economies of scope has no direct implications for the scope of the business enterprise. However, if economies of scope are based upon the common and recurrent use of proprietary knowhow or the common and recurrent use of a specialized and indivisible physical asset, then multiproduct enterprise (diversification) is an efficient way of organizing economic activity. These propositions are first developed in a general context and then examined in the context of diversification in the U.S. Petroleum industry.
We rationalize the cross-holdings of debt and equity within the Japanese keiretsu as a contingent governance mechanism through which internal discipline is sustained over time. The reciprocal allocation of control rights supports cooperation and mutual monitoring among managers through a coalition-enforced threat of removal from control. In financial distress this threat is less effective, and the governance mode shifts to hierarchical enforcement under main bank leadership. The model is consistent with the capital structure, the distribution of claims, the extent of intragroup trading, and patterns of investor intervention within the groups.
This paper reviews the evolution of industrial groups in the United States and then briefly compares their historical development with that of groups in other advanced market economies. The central role of the shift from attempting to achieve market control through contractual cooperation to achieve it through administrative efficiency, is underlined. Such a shift has occurred much earlier in the United States than in other economies.
In many successful late-industrializing countries in the 20th century, business groups with operating units in technologically unrelated industries have acted as the microeco-nomic agent of growth. This paper explores why this business form has characterized countries which industrialized 'late', and why this form succeeded in the early phases of catching up whereas the advanced-country conglomerate has had an undistinguished performance. The paper uses internal resource-base theories of the firm to explore the significance of organizational knowledge and resulting increasing returns in the group form which, even in mature markets and especially in late industrialization, constitute a sustainable source of competitiveness. In the case of late industrialization foreign technology acquisition capability became a necessary condition for corporate success. In the best diversified business groups this capability was transformed into organizational know how that provided a key resource in the effectiveness of corporate growth through diversification. The first two parts of the paper briefly survey diversified industrial groups in historical contexts and then across a broad array of late-industrializing countries. Then the paper considers why diversification was not prevalent among firms attempting to catch up in earlier historical periods, why the strategy of leading late industrializing firms was one of diversification rather than specialization and why their chosen diversification path was one involving technologist colly unrelated industries. This is followed by the core argument of the paper about the transformation of technology acquisition into a competitive asset and illustrated with evidence from South Korea. Finally, the paper analyzes why the behavior of the late industrializing group differs from that of the American conglomerate.
This study analyzes the effects of right-wing extremism on the well-being of immigrants based on data from the German Socio-Economic Panel (SOEP) for the years 1984 to 2006 merged with state-level information on election outcomes. The results show that the life satisfaction of immigrants is significantly reduced if right-wing extremism in the native population increases. Moreover ; the life satisfaction of highly educated immigrants is affected more strongly than that of low-skilled immigrants. This supports the view that policies aimed at making immigration more attractive to the high-skilled have to include measures that reduce xenophobic attitudes in the native population. --
This inductive study offers an examination of 23 cases in which informants from firms engaged in large-scale global projects reported unforeseen costs after failing to comprehend cognitive-cultural, normative, and/or regulative institutions in an unfamiliar host societal context. The study builds on the conceptual framework of institutional theory. The findings, which include propositions and a generic narrative model, contribute to theoretical knowledge of how institutional exceptions arise, how they are resolved, and how they typically involve three general phases: ignorance, sensemaking, and response. The findings also articulate the kinds of institutional transaction costs that an entrant incurs in each of the three phases, and the conditions that lead to the growth of these costs. Journal of International Business Studies (2008) 39, 562–588. doi:10.1057/palgrave.jibs.8400370
Many economic researchers have attempted to measure the effect of aggregate market or public policy variables on micro units by merging aggregate data with micro observations by industry, occupation, or geographical location, then using multiple regression or similar statistical models to measure the effect of the aggregate variable on the micro units. The methods are usually based upon the assumption of independent disturbances, which is typically not appropriate for data from populations with grouped structure. Incorrectly using ordinary least squares can lead to standard errors that are seriously biased downward. This note illustrates the danger of spurious regression from this kind of misspecification, using as an example a wage regression estimated on data for individual workers that includes in the specification aggregate regressors for characteristics of geographical states. Copyright 1990 by MIT Press.
This chapter discusses job market signaling. The term market signaling is not exactly a part of the well-defined, technical vocabulary of the economist. The chapter presents a model in which signaling is implicitly defined and explains its usefulness. In most job markets, the employer is not sure of the productive capabilities of an individual at the time he hires him. The fact that it takes time to learn an individual's productive capabilities means that hiring is an investment decision. On the basis of previous experience in the market, the employer has conditional probability assessments over productive capacity with various combinations of signals and indices. This chapter presents an introduction to Spence's more extensive analysis of market signaling.
I. Introduction, 488. — II. The model with automobiles as an example, 489. — III. Examples and applications, 492. — IV. Counteracting
institutions, 499. — V. Conclusion, 500.
This paper presents evidence suggesting that information and incentive problems in the capital market affect investment. We
come to this conclusion by examining two sets of Japanese firms. The first set has close financial ties to large Japanese
banks that serve as their primary source of external finance and are likely to be well informed about the firm. The second
set of firms has weaker links to a main bank and presumably faces greater problems raising capital. Investment is more sensitive
to liquidity for the second set of firms than for the first set. The analysis also highlights the role of financial intermediaries
in the investment process.
This paper attempts to provide the user of linear multiple regression with a battery of diagnostic tools to determine which, if any, data points have high leverage or influence on the estimation process and how these possibly discrepant data points differ from the patterns set by the majority of the data. The point of view taken is that when diagnostics indicate the presence of anomolous data, the choice is open as to whether these data are in fact unusual and helpful, or possibly harmful and thus in need of modifications or deletion. The methodology developed depends on differences, derivatives, and decompositions of basic regression statistics. There is also a discussion of how these techniques can be used with robust and ridge estimators. An example is given showing the use of diagnostic methods in the estimation of a cross-country savings rate model.
The first purpose of this paper is to design a model of governance structure, called the contingent governance, which can control the free-riding problem in teams in the second-best manner. The second is to show, by a new method of comparative static analysis, that the effectiveness of the contingent governance may be enhanced by complementary institutional arrangements of the imperfect labor market and bank-centered financial system. The paper discusses the implications of such institutional complementarity for the dynamic change of the Japanese main bank system and financial system design of transitional economies. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
Diversified business groups dominate the private sectors of most of the world's economies. Several of these economies have undergone sudden policy changes that significantly increase domestic competitive intensity. The authors demonstrate how the changes in corporate scope that accompany such 'competitive shocks' can be used to weigh the importance of different explanations for the existence of diversified business groups. The authors illustrate their reasoning by studying the restructuring of two of India's largest business groups following a comprehensive post-1991 package of policy reforms. The case studies also elucidate aspects of the restructuring process that should inform larger-sample empirical analyses. Copyright 1998 by Blackwell Publishing Ltd
Numerous countries have undergone rapid transitions in their economic environments. Yet, little is known about firms' responses to such transitions. We use field-collected data to study the evolution of eighteen large and diversified business groups in Chile (1987-1997) and India (1990-1997). The chosen periods correspond to significant deregulation in the primary markets in both countries. Conventional wisdom suggests that the intermediation roles played by business groups ought to decrease during these periods. However, we find an increase in group scope, an increase in the strength of the social and economic ties that bind together group firms, an increase in self-reported intermediation attempts by the groups, and some evidence that these actions are associated with improvements in accounting and stock-market performance of the group affiliates. We suggest that the slow development of market intermediaries, in a manner suggested by institutional economics, and the attendant lack of reduction in transaction costs in primary markets, can explain these findings. Copyright (c) 1999 Massachusetts Institute of Technology.
This paper outlines a theory of the multiproduct firm. Important building blocks include excess capacity and its creation, market imperfections, and the peculiarities of organizational knowledge, including its fungible and tacit character. A framework is adopted in which profit seeking firms are seen to diversify in order to avoid the high transactions costs associated with using various markets to trade the services of various specialized assets. Neoclassical explanations of the multiproduct firm are shown to be seriously deficient.
This paper emphasizes the important role played by intermediaries in the economy, including wholesalers, retailers, and financial firms. The paper defines an intermediary as an economic agent that purchases from suppliers for resale to buyers or that helps buyers and sellers meet and transact. Intermediaries coordinate transactions and provide the institutions of exchange that constitute market microstructure. Intermediaries set prices, manage inventories, coordinate exchange, and provide information through guarantees and delegated monitoring. These crucial activities help to explain how markets attain equilibrium prices and quantities. The paper suggests that the study of intermediation should be incorporated into mainstream economic analysis. Copyright 1996 by American Economic Association.
The authors use the transactions cost approach to analyze the diversification strategy and the resulting structure chosen by Korean business groups to overcome market imperfections prevalent in developing countries. Business groups that have multidivisional struc ture are thought to show superior economic performance because such s tructure reduces transactions costs arising from organizational failure. Also, major Korean business groups have a "relational structure," showing both vertical integration and the characteristics of the conglomerate. The authors modify the model of R. E. Caves and M. Uekusa (1976), used for Japan, to obtain the empirical result tha t group-affiliated firms show superior economic performance. Copyright 1988 by Blackwell Publishing Ltd.
Industrial de-diversification and its consequences for productivity
- F Lichtenberg
Business groups, chapter 18
- M Granovetter
A Mexican elite family
- L A Lomnitz