“Business is thus the combination of these three

“Business
analysts like to argue that conglomerates will become less prevalent as markets
develop, but conglomerates are also driven by families’ desire to provide
opportunities for their offspring. Business analysts point to the logic of the
market to explain mergers and acquisitions, but an equally powerful reason may
be family affinity.”  (The Economist, 2015)

 

Business groups
(BGs) are powerful economic and political actors in many emerging economies.
They are becoming increasingly important for the global economy. (The
Economist, 2011, 2014) Business groups have recently emerged as a distinct
theme in the literature. Part of the increased interest in business groups
arises from the internationalization of developing country firms and their
ability to compete against, and even acquire, developed-country

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firms.
Researchers refer to these diversified sets of firms as business groups, and
view them as a new organizational form that requires an explanation.(Cuervo-Cazurra, 2006) At one time
state-owned enterprises with a focus on specific industries emerged and
flourished as another prominent variety of large enterprises, but their
economic presence has been in relative decline in many economies, especially since
the 1980s. The business group organization has been the pre-eminent form of
large enterprises, especially in emerging markets, since the early decades of
the twentieth century. Business groups, by contrast, have remained a core of
the large enterprise sector with their characteristic wide and unrelated
product portfolio, often combined with the “pyramidal” structure of
ownership. Moreover, usually families have kept their ownership and control of
business groups. It is thus the
combination of these three factors that has attracted scholarly and popular
attention: unrelated product portfolio, pyramidal ownership structure, and
family ownership and control.(Colpan, 2010)

Despite the
multiplicity of studies of business groups, there is no accepted definition of
business group in the literature. (Khanna and
Yafeh, 2015) Many
of the sociology-based definitions of business group are quite broad, highlighting
the multiple relationships that tie firms in a business group together. This
provides richness in the relationships analyzed.(Cuervo-Cazurra, 2006) For example, Leff
defines a business group as ” a group of companies that does business in
different markets under a common administrative or financial control ” and that
are “linked by relations of interpersonal trust, on the basis of a similar
personal, ethnic or commercial background.(Nh, 1978) Granovetter
reviews previous studies of business groups and provides an all – encompassing
definition of a business groups as ” a collection of firms bound together in
some formal and/or informal ways.(Smelser, 2005) More recently, Yiu,
Burton, and Lu define business groups as ” a collection of legally independent
firms that are bound by economic (such as ownership, financial, and commercial)
and social (such as family, kinship, and friendship) ties.”(Yiu, 2005)

Economic-based
definitions of business groups are generally narrower. They highlight
diversification as the hallmark of business groups, providing a sharper distinction
from other networks of firms. Additionally, many of these economic-based definitions
also discuss family ownership as the second separating characteristic.(Cuervo-Cazurra, 2006) For instance, Chang
and Hong denote business groups as ” a collection of formally independent firms
under single common administrative and financial control , that are owned and
controlled by certain families”.(Chang, 2002) Fisman
specifies the business groups as a ” diverse set of businesses , often
initiated by a single family , and bound together by equity cross-ownership and
common board membership.(Fisman, 2004) Ghemawat and
Khanna explain the term of business groups as ” an organizational form
characterized by diversification across a wide range of businesses, partial
financial interlocks among them, and, in many cases, familial control.(Ghemawat, 1998) Therefore, to
limit the determination of term, Cuervo- Cazurra proposes to distinguish
business groups from other types of firm networks based on the relationship
among firms and narrows down the definition of a business group to a set of
legally-separate firms with stable relationships operating in multiple
strategically- unrelated activities and under common ownership and control.(Cuervo-Cazurra, 2006) 

Collections of
firms with stable relationships, or firm networks, are an organizational form
that falls in between the market and hierarchy extremes. Firm networks are not
markets because the relationships among firms are stable and long-term. At the
same time , firm networks are not hierarchies because the firms that compose
the network are legally separate entities that can enter into contracts
independently of one another.(Holmstrom and Tirole, 1989)

Figure 1 :
Separating business groups from other firm networks

 

A network of
suppliers is a collection of legally separate firms that have stable
relationships as well as formal and informal exchanges among personnel, and
that share knowledge in order to reduce opportunism and facilitate innovation.(Takeishi, 2002) In a network of
suppliers of a leading firm , such as the Toyota network , sub-suppliers
provide leading suppliers with parts , who , in turn , provide the leading firm
with systems to assemble into a complete product.(Dyer and Nobeoka, 2000)