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Keywords:

  • Corporate Governance;
  • Business Groups;
  • India;
  • Institutional Theory;
  • Transactions Cost Theory

ABSTRACT

Manuscript Type: Empirical

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