Conglomerates in the Indian market

Abstract

Khanna and Palepu (1999) argued that diversified firms under a single parent (conglomerates) are better equipped to handle the business environment in emerging markets and so firms operating in such markets should adopt the diversification strategy to succeed in such conditions. Khanna & Palepu argue that conglomerates have the “soft infrastructure” required to fill in the inefficiencies present in the emerging markets such as absence of large number of B-Schools to provide the human capital for running business, absence of financing institutions like investment banks and well-established following of standard accounting practices. While the arguments mentioned above do sound good, it is worth mentioning that India has undergone rapid changes in several aspects following the liberalization of its economy in 1992. Given the situation as of 2015 when India is a booming economy having enjoyed several years of double-digit growth rate, one cannot be sure as to whether the arguments made by Khanna and Palepu still hold true today. With access to financial data becoming easier than ever, we try to test the validity of Khanna & Palepu’s arguments in the further sections of this report with the latest available financial data. The intention of this project is to study the performance of diversified and focused firms in India and try to answer the question “Is diversification the right strategy for firms intending to grow in India?”