Growth and persistence of business groups in emerging markets: towards solving the puzzle

Abstract

Business groups have proved to be remarkably resilient. Their presence in a wide variety of institutional contexts, their long histories, and their persistence in emerging economies despite widespread institutional changes suggest an ability to cope with and adapt to institutional change. In this study, taking advantage of large scale pro-market reforms in India, we seek to answer the question that has puzzled scholars: why do business groups persist? We argue that the structure of business groups, particularly the presence of a common dominant owner, helps them cope with change. Freed of the problems risk aversion and myopia that typically accompany separation of ownership and control, firms affiliated to business groups are able to exploit the wide range of opportunities that pro-market reforms inevitably provide. Further, we suggest that by providing affiliate firms with access to a diverse range of resources due to their ownership in a variety of firms, active core owners expand the scope of available opportunities to them. Finally, we claim that the improved corporate governance norms in emerging economies, a consequence of institutional reforms, enhance the value adding potential of active core owners. Our empirical analyses on a sample of Indian group and standalone firms for the period 2001–2010 lends support to our arguments.