Business Groups as Hierarchies of Firms: Determinants of Vertical Integration and Performance

48 Pages Posted: 19 Jul 2013

See all articles by Carlo Altomonte

Carlo Altomonte

Bocconi University - Department of Policy Analysis and Public Management

Armando Rungi

IMT Institute for Advanced Studies; Bocconi University

Multiple version iconThere are 3 versions of this paper

Date Written: May 24, 2013

Abstract

We explore the nature of Business Groups, that is network-like forms of hierarchical organization between legally autonomous …firms spanning both within and across national borders. Exploiting a unique dataset of 270,474 headquarters controlling more than 1,500,000 (domestic and foreign) affiliates in all countries worldwide, we …find that business groups account for a significant part of value-added generation in both developed and developing countries, with a prevalence in the latter. In order to characterize their boundaries, we distinguish between an affiliate vs. a group-level index of vertical integration, as well as an entropy-like metric able to summarize the hierarchical complexity of a group and its trade-off between exploitation of knowledge as an input across the hierarchy and the associated communication costs. We relate these metrics to host country institutional characteristics, as well as to the performance of affiliates across business groups. Conditional on institutional quality, a negative correlation exists between vertical integration and hierarchical complexity in defining the boundaries of business groups. We also …find a robust (albeit non-linear) positive relationship between a group’s hierarchical complexity and productivity which dominates the already known correlation between vertical integration and productivity. Results are in line with the theoretical framework of knowledge-based hierarchies developed by the literature, in which intangible assets are a complementary input in the production processes.

Keywords: production chains, hierarchies, business groups, property rights, fi…nancial development, contract enforcement, vertical integration, corporate ownership, organization of production, productivity

JEL Classification: L22, L23, F23, L25, D24, G34

Suggested Citation

Altomonte, Carlo and Rungi, Armando, Business Groups as Hierarchies of Firms: Determinants of Vertical Integration and Performance (May 24, 2013). ECB Working Paper No. 1554. Available at SSRN: https://ssrn.com/abstract=2269638

Carlo Altomonte (Contact Author)

Bocconi University - Department of Policy Analysis and Public Management ( email )

Via Roentgen 1
Milan, 20136
Italy

Armando Rungi

IMT Institute for Advanced Studies ( email )

Complesso San Micheletto
Lucca, 55100
Italy
393334621884 (Phone)

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

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