Effect of Business Group Heterogeneity on New Venture Creation: Evidence from India

Abstract

This paper investigates the impact of BG heterogeneity on new venture creation (NVC). NVC is an important strategic choice of generic growth through internal resources, adopted by BG affiliated firms. Existing research has suggested that BG affiliated firms would have a positive association with entrepreneurial orientation owing to their long term orientation (Lumpkin, Brigham, and Moss, 2010; Naldi et al., 2007). However there is a lack of studies that have looked at the impact of heterogeneity within and among BG affiliated firms on such strategic choices. We argue here that the ease of NVC increases with bigger BGs, due to better internal resource provision, of alternatives to external factor markets. In particular powerful firms within the BGs, have greater access to these internal resources.

Using insights from inter-organizational power (Brass, 2005a; Emerson, 1962; Huxham and Beech, 2008; Mcneil, 1978) and the resource based view (RBV) (Barney, 1991, 1996; Wernerfelt, 1984, 1995) we model the impact of BG heterogeneity on NVC. We propose that the appropriation of group benefits may not be even across all member firms within the BG, as member firms with strong power within a group are likely to appropriate a greater share of internal market benefits to enhance their own growth (Kim, Hoskisson, and Wan, 2004) through NVC. Thus, we seek to provide a nuanced understanding of the benefits of group affiliation by examining the potential effects of inter-organizational power-dependence on NVC. Empirical analysis on a database of 8344 new projects initiated by 526 BG affiliated firms within a 28 year period from 1988 to 2015 revealed that, the group size is positively related to NVC. We also found heterogeneity among the BG affiliated firms on the extent of their involvement in NVC. This heterogeneity was attributed to the power commanded by the BG firm within the group.

This paper contributes to existing literature in several ways. It contributes to the growing literature on BG heterogeneity and its impact on strategy (Chang and Hong, 2000; GarcÍa-Álvarez and López-Sintas, 2001; George and Kabir, 2012; Ghemawat and Khanna, 1998; Kim et al., 2004; Lins and Servaes, 2002; Silva, Majluf, and Paredes, 2006). This study also contributes to the literature on family business by reconciling the positive and negative views on the effect of family firms on NVC (Naldi et al., 2007; Salvato, 2004; Short et al., 2009; Zahra, Hayton, and Salvato, 2004). Our results bring forward a nuanced understanding of the mechanisms influencing BG firms to opt for NVC.