Are there limits to diversification in emerging economies? Distinguishing between firm-level and business group strategies

Abstract

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.