Group Affiliation and Entry Barriers: The Dark Side Of Business Groups In Emerging Markets

Business groups dominate the economic landscape in many economies around the world. While business groups overcome the institutional voids arising due to inefficiencies of external markets, they also possess market power, which could be economically and socially counterproductive, especially for unaffiliated firms. Drawing on the transaction cost and industrial organization economics, we examine whether the presence of business group affiliated firms in industries restricts the entry of unaffiliated firms or firms affiliated with small- and medium-size business groups. Findings based on Indian firms suggest that investments by business group affiliated firms in an industry have an inverted U-shaped relationship with the investment by unaffiliated firms. However, investments by firms affiliated with large-sized business groups have a U-shaped relationship with the investment by affiliates of small and medium business groups. These findings suggest that the market power of business groups and entry barrier relationship is contingent on the size of the business groups.

[1]  H. Demsetz,et al.  The Cost of Transacting , 1968 .

[2]  Ajai S. Gaur,et al.  Corporate Expansion During Pro-Market Reforms in Emerging Markets: The Contingent Value of Group Affiliation and Diversification , 2017 .

[3]  W. Diebold,et al.  Asia's Next Giant: South Korea and Late Industrialization , 1990 .

[4]  M. Porter.  How Competitive Forces Shape Strategy , 1989 .

[5]  David E. Weinstein,et al.  Japan's Corporate Groups: Collusive or Competitive? An Empirical Investigation of Keiretsu Behavior , 1995 .

[6]  Wladimir M. Sachs,et al.  Coevolution of Institutions and Corporations in Emerging Economies: How the Salim Group Morphed into an Institution of Suharto's Crony Regime , 2008 .

[7]  Nandini Gupta,et al.  Incumbents and protectionism: The political economy of foreign entry liberalization , 2008 .

[8]  T. Khanna,et al.  Why Focused Strategies May Be Wrong for Emerging Markets , 1997 .

[9]  Ajai S. Gaur,et al.  A systematic approach to conducting review studies: An assessment of content analysis in 25years of IB research , 2017 .

[10]  Hyun-Han Shin,et al.  Business groups and corporate transparency in emerging markets: Empirical evidence from India , 2013 .

[11]  Ajai S. Gaur,et al.  Business Group Affiliation, Firm Governance, and Firm Performance: Evidence from China and India , 2009 .

[12]  R. Caves.  International differences in industrial organization , 1989 .

[13]  Ajai S. Gaur,et al.  Product Diversification and International Expansion of Business Groups , 2011 .

[14]  Will Mitchell,et al.  Two Faces: Effects of Business Groups on Innovation in Emerging Economies , 2004, Manag. Sci..

[15]  Lisa A. Keister,et al.  Chinese Business Groups: The Structure and Impact of Interfirm Relations during Economic Development , 2000 .

[16]  M. Hobday,et al.  Technological Innovation and Business Groups , 2010 .

[17]  Ajai S. Gaur,et al.  Business group affiliation and post-acquisition performance: An extended resource-based view , 2017 .

[18]  Tarun Khanna,et al.  Business groups and social welfare in emerging markets: Existing evidence and unanswered questions , 2000 .

[19]  J. Bain.  Barriers to new competition , 1957 .

[20]  G. Hamilton,et al.  Market, Culture, and Authority: A Comparative Analysis of Management and Organization in the Far East , 1988, American Journal of Sociology.

[21]  R. Feenstra,et al.  Chaebol and Catastrophe: A New View of the Korean Business Groups and Their Role in the Financial Crisis , 2002, Asian Economic Papers.

[22]  M. Porter,et al.  From Entry Barriers to Mobility Barriers: Conjectural Decisions and Contrived Deterrence to New Competition , 1977 .

[23]  S. Mullainathan,et al.  Ferreting Out Tunneling: An Application to Indian Business Groups , 2000 .

[24]  International Acquisitions and the Globalization of Firms from India , 2009 .

[25]  B. Kedia,et al.  Indian business groups: Evolution and transformation , 2007 .

[26]  Ajai S. Gaur,et al.  International Diversification, Business Group Affiliation and Firm Performance: Empirical Evidence from India , 2008 .

[27]  Ajai S. Gaur,et al.  Institutions, Resources, and Internationalization of Emerging Economy Firms , 2013 .

[28]  Ajai S. Gaur,et al.  Are large business groups conducive to industry innovation? The moderating role of technological appropriability , 2017 .

[29]  Sea-Jin Chang,et al.  Economic Performance of Group-Affiliated Companies in Korea: Intragroup Resource Sharing and Internal Business Transactions , 2000 .

[30]  Ajai S. Gaur,et al.  International Diversification of Emerging Market Firms: The Role of Ownership Structure and Group Affiliation , 2015 .

[31]  Luis A. Rios,et al.  Capital Markets and Firm Organization: How Financial Development Shapes European Corporate Groups , 2013, Manag. Sci..

[32]  T. Khanna,et al.  Facilitating Development: The Role of Business Groups , 1998 .

[33]  Jan W. Rivkin,et al.  Estimating the performance effects of business groups in emerging markets , 2001 .

[34]  Thomas A. Hemphill.  Antitrust, Dynamic Competition, and Business Ethics , 2004 .

[35]  Mauro F. Guillén,et al.  Business Groups in Emerging Economies: A Resource-Based View , 2000 .

[36]  Ajai S. Gaur,et al.  Home country supportiveness/unfavorableness and outward foreign direct investment from China , 2017 .

[37]  Tarun Khanna,et al.  The Nature of Diversified Business Groups: A Research Design and Two Case Studies , 2003 .

[38]  L. Paine.  Ideals of Competition and Today’s Marketplace , 1990 .

[39]  J. van Oosterhout,et al.  Business group affiliation, performance, context, and strategy: a meta-analysis , 2011 .

[40]  H. Thomas,et al.  Strategic Groups: Theory, Research and Taxonomy , 1986 .

[41]  Ajai S. Gaur,et al.  Methodological Advances in the Analysis of Bipartite Networks , 2013 .

[42]  N. Leff,et al.  Entrepreneurship and Economic Development: The Problem Revisited , 1979 .

[43]  N. Leff,et al.  Industrial Organization and Entrepreneurship in the Developing Countries: The Economic Groups , 1978, Economic Development and Cultural Change.

[44]  Richard A. Posner,et al.  Social Costs of Monopoly and Regulation , 1974 .

[45]  Hyun-Han Shin,et al.  Financing constraints and internal capital markets: Evidence from Korean `chaebols' , 1999 .

[46]  R. Fisman.  Estimating the Value of Political Connections , 2001 .

[47]  J. Boatright.  Does Business Ethics Rest on a Mistake? , 1999, Business Ethics Quarterly.

[48]  René M. Stulz,et al.  Are Internal capital Markets Efficient , 1998 .

[49]  T. Khanna,et al.  Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups , 2000 .

[50]  Ajai S. Gaur,et al.  Governance Structure, Innovation and Internationalization: Evidence from India , 2013 .

[51]  Sea Jin Chang,et al.  Strategy, Structure and Performance of Korean Business Groups: A Transactions Cost Approach , 1988 .

[52]  J. Henley,et al.  Growth and Persistence of Large Business Groups in India , 2007 .

[53]  Ajai S. Gaur,et al.  Pro-Market Institutions and Global Strategy: The Pendulum of Pro-Market Reforms and Reversals , 2018, Academy of Management Proceedings.

[54]  R. Feenstra,et al.  A Market-Power Based Model of Business Groups , 2003 .

[55]  Erin E. Makarius,et al.  Business group reputation and affiliates’ internationalization strategies , 2018 .

[56]  J. Nelson.  Business ethics in a competitive market , 1994 .

[57]  Melville T. Cottrill.  Corporate social responsibility and the marketplace , 1990 .

[58]  Zi-Lin He,et al.  Thinking about U: Theorizing and testing U‐ and inverted U‐shaped relationships in strategy research , 2016 .

[59]  M. Whinston,et al.  Multimarket Contact and Collusive Behavior , 1990 .

[60]  K. R. Harrigan.  Vertical Integration and Corporate Strategy , 1985 .

[61]  Deeksha A. Singh,et al.  Export Performance of Emerging Market Firms , 2009 .

[62]  Jagdish N. Bhagwati,et al.  Directly Unproductive, Profit-Seeking (DUP) Activities , 1982, Journal of Political Economy.

[63]  Robert Z. Lawrence.  Japan's Different Trade Regime: An Analysis with Particular Reference to Seiretsu , 1993 .

[64]  A. Delios,et al.  Corporate governance, board networks and growth in domestic and international markets: Evidence from India , 2017 .

[65]  C. Fumagalli,et al.  The Deep-Pocket Effect of Internal Capital Markets , 2009 .

[66]  B. Elango,et al.  Building capabilities for international operations through networks: a study of Indian firms , 2007 .

[67]  Yishay Yafeh,et al.  Business Groups in Emerging Markets: Paragons or Parasites? , 2005 .

[68]  Sharon Belenzon,et al.  Innovation in Business Groups , 2007, Manag. Sci..

[69]  Ajai S. Gaur,et al.  Managing Multi-Business Firms: A Comparison between Korean Chaebols and Diversified US Firms , 2013 .

[70]  Vikram Nanda,et al.  Affiliated Firms and Financial Support: Evidence from Indian Business Groups , 2007 .

[71]  K. Boulding,et al.  Barriers to New Competition: Their Character and Consequences in Manufacturing Industries. , 1957 .