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Indian Business Groups: Performance & Structure

This document discusses Indian business groups, diversified US firms, and transaction cost theory. It notes that Indian business groups are collections of publicly traded firms with common family ownership operating in various industries. While they have some features of conglomerates, their ability to share capital is limited. Transaction cost theory suggests firm structure depends on institutional context, and business groups can help address market failures in emerging markets like India. However, group affiliation also brings potential costs like conflicts of interest. Studies find performance varies, with some large Indian business groups showing higher performance than other firms due to factors like political connections.

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13 views1 page

Indian Business Groups: Performance & Structure

This document discusses Indian business groups, diversified US firms, and transaction cost theory. It notes that Indian business groups are collections of publicly traded firms with common family ownership operating in various industries. While they have some features of conglomerates, their ability to share capital is limited. Transaction cost theory suggests firm structure depends on institutional context, and business groups can help address market failures in emerging markets like India. However, group affiliation also brings potential costs like conflicts of interest. Studies find performance varies, with some large Indian business groups showing higher performance than other firms due to factors like political connections.

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anon_726218985
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© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Indian Business Groups

 Collection of publicly traded firms in a wide variety of industries


 Has largely common ownership and control, usually by family
 Has features of both conglomerates and LBO associations
 Ability to use internal capital markets to fund other affiliates is limited
 Important role is to launch new ventures to acquire ownership stakes

Diversified US firms:

 Underperformance compared to their focused competitors


 Inappropriate allocation of decision rights, inefficient allocation of capital, and poor internal
governance.

Transaction Cost Theory:

 Optimal structure of a firm depends on its institutional context


 In the United States the institutional context is characterized by well-functioning capital,
labour, and product markets.
 Emerging markets face variety issues such as inadequate disclosure and weak corporate
governance in Financial markets, ineffective intermediaries and weak securities regulation.
 An enterprise may be most profitably pursued as part of a large diversified business group
that can act as an intermediary between individual entrepreneurs and imperfect markets
 Firms affiliated with business groups benefit from access to these internal institutions to
mitigate external market failure.

Issues in group affiliation:

 Group affiliation cost might exceed potential benefits


 Conflict of interests between controlling family shareholders and minority shareholders
 Common family ownership results in misallocation of capital in unprofitable ventures
 Problems associated with affiliation with diversified is exacerbated due to weak disclosure
requirements, ineffective governance mechanisms, and a poorly developed market for
corporate control.

Performance analysis: Group affiliates vs Unaffiliated firms

 Performance is measured using Tobin's q and Return on Assets.


 firms affiliated with a large majority of diversified Indian business groups have lower Tobin's
q measures than unaffiliated focused firms
 But those firms affiliated with the most highly diversified Indian business groups have higher
Tobin's q measures than other firms in the economy.
 Indian mitigate the costs of diversification because they are organized as a collection of
independent companies.
 Large diversified business groups derive economic benefits from their political connections
in an economy where government regulation plays an important role.
 performance of firms affiliated with diversified groups in India differ from the performance
of lines of business of U.S. conglomerates due to substantial differences in group structure in
India relative to diversified firms in advanced economies
 The differences in performance results of India from those for the United States are not only
affected by institutional context, but also by in organizational structure

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