Business Groups and Social Welfare in Emerging Markets: Existing Evidence & Unanswered Questions

European Economic Review

Posted: 16 Dec 1999

See all articles by Tarun Khanna

Tarun Khanna

Harvard University - Strategy Unit


This paper reviews existing studies of the role of business groups, a poorly understood organizational form that is ubiquitous in most emerging markets. Despite the abundance of descriptive and historical studies, each typically focused on a single country, there is a paucity of theoretical work and of econometric work on groups both within and across countries.

I first suggest that understanding the definition of business groups is itself an interesting, albeit under-studied, research issue. Absent a better understanding of the meaning of the term 'group,' it is difficult to systematically understand recent policy experiments in countries as varied as China, India and South Korea. I review definitions from a range of countries, with an aim to identifying common underlying elements. Most definitions emphasize a complex mixture of formal and informal ties as responsible for holding together group affiliates.

I then survey the existing empirical evidence on the performance effects of group affiliation. Group affiliation appears to be profitable in most emerging markets, though the underlying reasons for this effect are unclear. I review evidence related to four candidate theories. There is substantial evidence that part of the positive performance effect is due to welfare-enhancing functions originating in the idea that groups substitute for missing outside institutions. There is also evidence that part of the performance effect is due to welfare-reducing minority shareholder exploitation. Evidence supporting two other theories, that groups facilitate rent-seeking, and that groups are organizational devices which further the exercise of market power, is lacking.

Finally, I consider the effects of group ubiquity on future market structure. Theoretical results and anecdotal evidence suggest that groups might play a role in restricting de novo entry, with attendant welfare consequences. However, evidence is lacking on the extent to which groups hamper the future development of markets.

Note: This is a description of the article and not the actual abstract.

JEL Classification: G30, L20, L40, P5

Suggested Citation

Khanna, Tarun, Business Groups and Social Welfare in Emerging Markets: Existing Evidence & Unanswered Questions. European Economic Review, Available at SSRN:

Tarun Khanna (Contact Author)

Harvard University - Strategy Unit ( email )

Harvard Business School
Boston, MA 02163
United States
617-495-6038 (Phone)
617-495-0355 (Fax)

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