Business Groups as an Organizational Model

Abstract

Business groups are an organizational model in which collections of legally independent firms bounded together with formal and informal ties use collaborative arrangements to enhance their collective welfare. Among the different varieties of business groups, diversified business groups that exhibit unrelated product diversification under central control, and often containing chains of publicly-listed firms, are the most studied type in the management literature. The reason is that they challenge two traditionally-held assumptions. First, that broad and especially unrelated diversification have a negative impact on performance, and thus business groups should focus on a narrow scope of related businesses. Second, that such diversification is only sustainable in emerging economies in which market and institutional underdevelopment are more common and where business groups can provide a solution to such imperfections. However, a historical perspective indicates that diversified business groups are a long lived organizational model, and are present in emerging and advanced economies, illustrating how business groups adapt to different market and institutional settings. This evolutionary approach also highlights the importance of going beyond diversification when studying business groups, and redirecting studies toward the evolution of the group structure, their internal administrative mechanisms and other strategic actions beyond diversification such as internationalization.

Keywords: Business groups, emerging markets, large enterprise, conglomerates, corporate governance

JEL Classification: M1, M2