The Performance of Group‐affiliated Firms during Institutional Transition: A Longitudinal Study of Indian Firms

• DOI: http://doi.org/10.1111/j.1467-8683.2009.00761.x
• Author: Vikas Kumar,Torben Pedersen,Alessandro Zattoni
• Date: 01 July 2009
• Published date: 01 July 2009

The Performance of Group-aff‌iliated Firms

during Institutional Transition: A Longitudinal

Study of Indian Firms

Alessandro Zattoni*, Torben Pedersen, and Vikas Kumar

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: Institutional and transaction cost theories highlight the idea that group-aff‌iliated f‌irms outper-

form unaff‌iliated f‌irms in emerging economies. However, the persistence of superior performance among group-aff‌iliated

f‌irms could be challenged by the recent, quick development of markets and institutions in these countries. This article

explores the link between f‌irm performance and the evolution of the institutional environment.

Research Findings/Insights: We analyze how business group aff‌iliation affected f‌irm performance in India in the post-

reform era, i.e., from 1990 to 2006. Our f‌indings show that: (1) the performance benef‌its of group aff‌iliation are evident in

the early phase of institutional transition, but level out in the late phase; (2) older group-aff‌iliated f‌irms are better able to

cope with institutional transition than younger group-aff‌iliated f‌irms; and (3) group-aff‌iliated service f‌irms are better able

to cope with institutional transition than group-aff‌iliated manufacturing f‌irms.

Theoretical/Academic Implications: Our f‌indings support institutional and transaction cost theories, as they show that: (1)

when labor, capital, and products markets are characterized by large imperfections and weak supporting institutions

business groups outperform independent companies; (2) when markets become more eff‌icient and institutions grow

stronger group-aff‌iliated f‌irms fail to show continued superior performance; and (3) heterogeneity among member f‌irms

may inf‌luence the appropriation of the benef‌its arising from group aff‌iliation. These f‌indings expand the traditional

understanding of the relationship between f‌irm performance and the institutional context in emerging economies, and

provide further support for the idea that the relative performance of group-aff‌iliated f‌irms is contingent upon the charac-

teristics of the institutional context and their particular features.

Practitioner/Policy Implications: The article has implications for managers and policy makers. Managers of business

groups should adapt the timing of strategies to the evolution of the institutional environment. Policy makers should focus

on the consequences of their policies, as they may undermine the eff‌iciency of large national companies.

Keywords: Corporate Governance, Business Groups, India, Institutional Theory, Transactions Cost Theory

INTRODUCTION

Business groups are the dominant organizational form in

emerging economies. A business group consists of indi-

vidual f‌irms with multiplelinks through which the f‌irms are

coordinated in order to achieve common goals (Granovetter,

1994; Leff, 1978; Strachan, 1976). Although business group

characteristics differ across countries, business groups have

two particular traits that distinguish them from other orga-

nizational forms – the existence of multiple ties among indi-

vidual f‌irms and the presence of an administrative center

aimed at coordinating group-aff‌iliated f‌irms (Khanna &

Rivkin, 2001).

Studies of business groups were fragmented until

recently. However, there has been a growing interest among

management and organizational scholars in this subject,

especially as it pertains to emerging economies (e.g., Chang

& Hong, 2002; Guillen, 2000; Keister, 1998; Khanna &

Palepu, 2000; Khanna & Rivkin, 2001). In emerging econo-

mies, capital, labor, and product markets are characterized

by high imperfections, and business groups are seen as

*Address for correspondence: Management Department, Parthenope University and

SDA Bocconi School of Management, Strategic and Entrepreneurial Management,

Department, Via Bocconi 8, 20136 Milano. Tel: +39-02-5836-2527; Fax: +39-02-5836-

2530; E-mail: alessandro.zattoni@unibocconi.it

510

Corporate Governance: An International Review, 2009, 17(4): 510–523

© 2009 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2009.00761.x