Business Groups, the Financial Market and Economic Development
38 Pages Posted: 21 Sep 1999
Date Written: August 1999
Business groups are an important aspect of the industrial organization of many developing countries. This paper develops a theory suggesting that they may be organizations that facilitate economic development in the presence financial market constraints.
An important function of the stockmarket is the diversification of risk that comes with specialized, productive technology. But in the face of serious information problems a well functioning stockmarket may fail to emerge, relegating the economy to a low productivity-poverty trap. Bilateral links between a firm and a group of others may be a more cost effective way to achieve risk-sharing. Such business groups may be feasible when a full-fledged stockmarket is not. As modernization takes place, either because information problems become less severe or more firms enter the economy, business groups actually expand in size before being abruptly rendered obsolete by the stockmarket. This is consistent with stylized facts from a number of emerging economies.
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JEL Classification: O14, O16, O17, P00, L00
Suggested Citation: Suggested Citation