Inside the business group black box: Exploring the structure-scope linkage

Abstract

Why do business group affiliates remain affiliates, retaining their legal independence, instead of morphing into divisions of a conventional diversified firm? This is not known despite the rich literature on business groups. Relatedly, it is not known whether affiliates make independent strategic choices? We investigate both these issues in this paper and suggest that being organised as a network of legally independent firms enables affiliates to make efficient choices and capture economies of scope even as it facilitates the collective business group to focus on gaining governance economies critical for sustaining a wide scope of businesses profitably. Consequently we establish business groups as a value adding organisational form whose sustenance is independent of the institutional context.