Policy Shocks, Market Intermediaries, and Corporate Strategy: 'The Evolution of Business Groups in Chile and India'

Numerous countries have undergone rapid transitions in their economic environments. Yet, little is known about firms' responses to such transitions. We use field-collected data to study the evolution of eighteen large and diversified business groups in Chile (1987-1997) and India (1990-1997). The chosen periods correspond to significant deregulation in the primary markets in both countries. Conventional wisdom suggests that the intermediation roles played by business groups ought to decrease during these periods. However, we find an increase in group scope, an increase in the strength of the social and economic ties that bind together group firms, an increase in self-reported intermediation attempts by the groups, and some evidence that these actions are associated with improvements in accounting and stock-market performance of the group affiliates. We suggest that the slow development of market intermediaries, in a manner suggested by institutional economics, and the attendant lack of reduction in transaction costs in primary markets, can explain these findings. Copyright (c) 1999 Massachusetts Institute of Technology.

[1]  R. Coase The Nature of the Firm , 1937 .

[2]  Brent R. Moulton Random group effects and the precision of regression estimates , 1986 .

[3]  G. Benston The Validity of Studies with Line of Business Data: Reply [The Validity of Profits-Structure Studies with Particular Reference to the FTC's Line of Business Data] , 1985 .

[4]  Cynthia A. Montgomery,et al.  Diversification, Ricardian rents, and Tobin's q , 1988 .

[5]  Douglas W. Diamond Financial Intermediation and Delegated Monitoring , 1984 .

[6]  O. Williamson,et al.  Markets and Hierarchies: Analysis and Antitrust Implications. , 1977 .

[7]  Pankaj Ghemawat,et al.  Games Businesses Play: Cases and Models , 1997 .

[8]  T. Khanna,et al.  Corporate Scope and Institutional Context: An Empirical Analysis of Diversified Indian Business Groups , 1996 .

[9]  A. Nanda,et al.  House of Tata , 1992 .

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

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

[12]  K. Eisenhardt Building theories from case study research , 1989, STUDI ORGANIZZATIVI.

[13]  Daniel F. Spulber Market Microstructure and Intermediation , 1996 .

[14]  Rudiger Dornbusch,et al.  The Chilean economy : policy lessons and challenges , 1994 .

[15]  E. Perotti,et al.  The governance structure of the Japanese financial keiretsu , 1994 .

[16]  A. Greif Cultural Beliefs and the Organization of Society: A Historical and Theoretical Reflection on Collectivist and Individualist Societies , 1994, Journal of Political Economy.

[17]  J. Sachs,et al.  Economic Reform and the Process of Global Integration , 1995 .

[18]  Akira Goto,et al.  Business groups in a market economy , 1982 .

[19]  A. Amsden,et al.  Project Execution Capability, Organizational Know-how and Conglomerate Corporate Growth in Late Industrialization , 1994 .

[20]  Kenneth A. Kavajecz,et al.  On the Formation and Structure of International Exchanges , 1999 .

[21]  Brent R. Moulton An Illustration of a Pitfall in Estimating the Effects of Aggregate Variables on Micro Unit , 1990 .

[22]  Harry W. Strachan,et al.  Family and other business groups in economic development: The case of Nicaragua , 1976 .

[23]  O. Williamson The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting , 1985 .

[24]  M. Guillén BUSINESS GROUPS IN ECONOMIC DEVELOPMENT. , 1997 .

[25]  M. Aoki THE CONTINGENT GOVERNANCE OF TEAMS: ANALYSIS OF INSTITUTIONAL COMPLEMENTARITY , 1994 .

[26]  David Encaoua,et al.  Organizational Efficiency and Monopoly Power - the Case of French Industrial Groups , 1982 .

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

[28]  F. Lefort,et al.  OWNERSHIP AND CAPITAL STRUCTURE OF CHILEAN CONGLOMERATES:FACTS AND HYPOTHESES FOR GOVERNANCE , 2000 .

[29]  M. Aoki Toward an Economic Model of the Japanese Firm , 2013 .

[30]  E. Lindenberg,et al.  Tobin's q Ratio and Industrial Organization , 1981 .

[31]  George A. Akerlof The Market for “Lemons”: Quality Uncertainty and the Market Mechanism , 1970 .

[32]  M. Spence Job Market Signaling , 1973 .

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

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

[35]  A. Schwarz A Nation In Waiting: Indonesia In The 1990s , 1994 .

[36]  D. Scharfstein,et al.  Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups , 1991 .

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

[38]  L. White,et al.  Industrial Concentration and Economic Power in Pakistan. , 1975 .

[39]  Cynthia A. Montgomery,et al.  Tobin's q and the Importance of Focus in Firm Performance , 1988 .

[40]  D. North Institutions, Institutional Change and Economic Performance: Economic performance , 1990 .