Owners' nonfinancial objectives and the diversification and internationalization of business groups

• Published date: 01 November 2023
• Author: Alvaro Cuervo‐Cazurra,Asli M. Colpan
• Date: 01 November 2023
• DOI: http://doi.org/10.1111/corg.12507

ORIGINAL ARTICLE

Owners' nonfinancial objectives and the diversification and

internationalization of business groups

Alvaro Cuervo-Cazurra

1

|Asli M. Colpan

2

1

D'Amore-McKim School of Business,

Northeastern University, Boston,

Massachusetts, USA

2

Graduate School of Management, Kyoto

University, Kyoto, Japan

Correspondence

Alvaro Cuervo-Cazurra, D'Amore-McKim

School of Business, Northeastern University,

313 Hayden Hall, 360 Huntington Avenue,

Boston, MA 02115, USA.

Email: a.cuervocazurra@neu.edu

Funding information

Cuervo-Cazurra thanks the Lloyd Mullin

Fellowship for financial support.

Abstract

Research Question/Issue: Studies on business groups, a collection of legally separate

firms operating in unrelated industries under common control, tend to compare the

behavior of firms affiliated with business groups and firms that are independent

companies. Unfortunately, this ignores the diversity among business groups based on

their controlling owner. Hence, in this conceptual article, we study how the types of

controlling owners impact the diversification and internationalization of business

groups.

Research Findings/Insights: Building on agency theory, we separate business groups

into five types based on their ultimate controlling owners (state, labor, family, mutual,

and bank) and identify their nonfinancial objectives. We argue that their nonfinancial

objectives result in diverging levels of diversification and internationalization of busi-

ness groups across owner types. Specifically, we propose that state-owned and

bank-owned business groups have a relatively high level of diversification, labor-

owned and mutual-owned business groups have a relatively moderate level, and

family-owned business groups have a relatively low level. We also argue that state-

owned and labor-owned business groups have a relatively low level of internationali-

zation, family-owned business groups have a relatively moderate level, and mutual-

owned and bank-owned business groups have a relatively high level. We add depth

to these ideas by proposing that pro-market reforms alter owners' ability to achieve

their nonfinancial objectives, leading to diverging changes in business groups' diversi-

fication and internationalization across owner types. Specifically, we propose that

following pro-market reforms, state-owned and bank-owned business groups experi-

ence a large decrease in their level of diversification, labor-owned and mutual-owned

business groups see a moderate decrease, and family-owned business groups have a

small decrease. We also argue that pro-market reforms lead state-owned and labor-

owned business groups to have a small increase in their level of internationalization,

family-owned a moderate increase, and mutual-owned and bank-owned to

experience a large increase.

Theoretical/Academic Implications: To the business groups literature, we highlight

the importance of controlling owners and their nonfinancial objectives as the drivers

of business group diversification and internationalization, complementing the usual

focus on market imperfections. To agency theory, we highlight the diversity of

owners' nonfinancial objectives and explain how these affect strategy,

Received: 30 November 2020Revised: 1 December 2022Accepted: 5 December 2022

DOI: 10.1111/corg.12507

Corp Govern Int Rev. 2023;31:869–891. wileyonlinelibrary.com/journal/corg © 2023 John Wiley & Sons Ltd.869

complementing the traditional focus on differences in objectives between owners

and professional managers driving strategy.

Practitioner/Policy Implications: Managers can defend decisions based on the often-

unstated nonfinancial objectives of the controlling owners, countering external inves-

tors' criticisms of managers misbehaving by not aiming to maximize profits.

KEYWORDS

agency theory, business groups, corporate governance, diversification, internationalization,

ownership

1|INTRODUCTION

Business groups,a collection of legally separate companies operating in

unrelatedindustries under common control, are importantorganizations

worldwide. Although much of the literature associates business groups

with emerging economies (Khanna & Palepu, 1997;Khanna&

Yafeh, 2007;Leff,1978), they exist in advanced economies as well

(Colpan & Hikino,2018a; Liang & Carney, 2020), making them a crucial

and at times misunderstood organizational type. Most analysesof busi-

ness groups' strategies compare the behavior of firms affiliated with

business groups to those that are unaffiliated, discussing the benefits

and costs derived from affiliation (Gaur & Delios, 2015; Guillén, 2002;

Hoskisson et al., 2004). However, this comparison misses the diversity

of business groupsbased on their ultimate controlling owners and their

essential role in strategic behavior. Some dichotomous comparisons

have indicatedthat family-owned business groupsdiffer from non-fam-

ily-owned ones(Morck & Yeung, 2003), or state-owned groups diverge

from non-state-owned ones in their behavior (Cuervo-Cazurra

et al., 2014). Still, we still do not have a well-established comparison

across multipletypes of ultimate controlling owners,creating confusion

in the literature. In fact, some research considers business groups as a

type of owner alongside others like family, the state, or institutional

investors (Boyd & Solarino, 2016; Solarino & Boyd, 2020;Young

et al., 2008), while others discuss how business groups are structured

(Yiu et al., 2007). All this creates gaps in our understanding of business

groups and opensopportunities for additionaltheorization.

Therefore, in this conceptual article, we build on agency theory

(Jensen & Meckling, 1976) to argue that business groups' controlling

owners vary in their nonfinancial objectives, that is, objectives of pri-

vate value creation that are not always directly connected with firm

profitability (Holt et al., 2017; McCann & Vroom, 2010; Zellweger

et al., 2013), and propose that these objectives drive variations in

business group strategy across owner types.

Specifically, we suggest separating business groups into five types

by their controlling owners (state, labor, family, mutual, and bank) and

propose that differences in their nonfinancial objectives lead to vary-

ing levels of business group scope, that is, diversification across indus-

tries and internationalization across countries. In particular, we argue

that state-owned and bank-owned business groups have a relatively

high level of diversification, labor-owned and mutual-owned business

groups have a relatively moderate level, and family-owned business

groups have a relatively low level. We also propose that state-owned

and labor-owned business groups have a relatively low level of inter-

nationalization, family-owned business groups have a relatively mod-

erate level, and mutual-owned and bank-owned business groups have

a relatively high level.

We add depth to these ideasby proposing that contextual changes

in the form of pro-market reforms alter owners' abilityto achieve their

nonfinancial goals, driving a diverging evolution of business groups'

diversification and internationalization. Specifically, we propose thatfol-

lowing pro-market reforms, state-owned and bank-owned business

groups experience a large decrease in diversification, labor-owned and

mutual-owned business groups see a moderate decrease,and family-

owned business groups have a small decrease in diversification level in

comparison to other groups. We also argue that pro-market reforms

lead state-owned and labor-owned business groups to have a small

increase in internationalization, family-owned a moderate increase, and

mutual-ownedand bank-owned to experience a large increase in inter-

nationalization levels in comparisonto other groups.

These ideas contribute to two streams of the literature: the topic

of business groups and agency theory. First, we provide new insights

into the business groups literature by revealing the importance of

controlling owners to explain the variation in logic for the strategic

scope of business groups. This is an essential and novel addition to

the literature, which has tended to focus on the firms affiliated with

business groups rather than the overall business groups themselves

(Gaur & Delios, 2015; Guillén, 2002; Hoskisson et al., 2004). Theoreti-

cally, much previous work on business groups has argued that

business groups diversify into many unrelated businesses to fill insti-

tutional voids in underdeveloped markets (Khanna & Palepu, 1997,

2000; Khanna & Yafeh, 2007). We complement this view by explain-

ing how the nonfinancial objectives of controlling owners drive

differences in diversification and internationalization among business

groups. This is important as reviews on the topic (Aguilera

et al., 2019; Colli & Colpan, 2016; Holmes et al., 2018; Khanna &

Yafeh, 2007) have indicated the need to analyze and explain the role

of their corporate governance and, especially, ownership. Our focus

on the controlling owners of business groups and their nonfinancial

objectives thus provides a novel explanation of the diversity across

business groups.

Second, we contribute to agency theory by providing a nuanced

explanation of owners' differences in their nonfinancial objectives.

870 CUERVO-CAZURRA AND COLPAN