The Nature of Diversified Business Group: A Research Design and Two Case Studies

Abstract

Diversified business groups dominate the private sectors of most of the world's economies. Several of these economies have undergone sudden policy changes that significantly increase competitive intensity. We demonstrate how the changes in corporate scope that accompany such "competitive shocks" can be used to choose among several candidate explanations for the existence of groups. We illustrate our reasoning by studying the restructuring of two of India's largest business groups following a comprehensive post-1991 reform package that can be construed as a competitive shock. The case studies suggest conceptualizing the business group as an organizational mechanism designed to allocate a scarce resource across multiple lines of business and guide the development of simple models that illustrate how changes in the value of such a resource (following a competitive shock), and changes in ambient competitive intensity, affect corporate scope. The case studies also expose a rich array of restructuring options that should inform larger-sample empirical analyses.

JEL Classification: N55, N15, L2