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date: 16 June 2019

Introduction

Abstract and Keywords

This book brings together an array of state-of-the-art research on the distinctive form of economic institution known as business groups. It seeks to strengthen both scholarly and policy-oriented understanding of the business group phenomenon, which is particularly prominent in emerging markets but also in some mature industrial economies. It makes two primary and related contributions. First, text which is nation-focused provides detailed analytical and historically grounded empirical treatments of business groups in many nations. Secondly, text which is cross-national subject-focused offers theoretically based discussion of how those nations compare to one another and fit into a global context. The combination of these perspectives—the empirically specific with the conceptually and comparatively general—gives the volume a broad handle on the diverse and complex evolutionary paths followed by the world's business groups.

Keywords: state-of-the-art research, business group, industrial economies, empirical treatments, evolutionary paths

THIS Handbook brings together an array of state‐of‐the‐art research on the distinctive form of economic institution known as “business groups.” The volume seeks to strengthen both scholarly and policy‐oriented understanding of the business group phenomenon, which is particularly prominent in emerging markets but also in some mature industrial economies. We see the volume making two primary and related contributions. First, the nation‐focused chapters provide detailed analytical and historically grounded empirical treatments of business groups in many nations. Secondly, the cross‐national subject‐focused chapters offer theoretically based discussion of how those nations compare to one another and fit into a global context. The combination of these perspectives—the empirically specific with the conceptually and comparatively general—gives the volume a broad handle on the diverse and complex evolutionary paths followed by the world's business groups.

Despite their high profiles in numerous countries and their prevalence and importance in the global economy as a whole, business groups remain an understudied phenomenon, although scholarly interest has intensified since the late 1990s. We see three primary reasons for this relative paucity of systematic research and the slowness until recently with which scholars have taken up the topic. The first is that researchers interested in business organization have tended to frame the problem in ways consistent with the study of mature industrial economies. For example, the influential classification by Chandler (1977, 1990) and Williamson (1975, 1985) of the organizational forms of large US corporations in the twentieth century (as functional, multidivisional, conglomerate, and holding company) makes no mention of “business group,” a distinct (p. 2) form often associated with developing economies that resembles the Chandler–Williamson “M” or multidivisional form in some respects while differing sharply in others. Secondly, accurate firm‐level data are difficult to obtain in emerging nations, where regulatory rules governing the disclosure of even the most basic financial and operational information typically remain weak. Thirdly, the family‐owned and otherwise closely held nature of group‐affiliated companies (especially the holding company positioned at the apex) often relieves groups of the reporting requirements to which publicly listed and widely held companies are subject.

The extant scholarly literature on the governance, strategies, structures, and performance of business groups in the developing world deals predominantly with particular national and regional cases, more often than not in East and South East Asian venues (see, e.g., Chang 2006). These regions were home to the “Japanese miracle” and the four “Asian Tigers” (Hong Kong, Singapore, South Korea, and Taiwan), all postwar developers in whose remarkable drives to global competitive success business groups figured prominently. The few truly comparative studies tend to juxtapose the high‐achieving Asian groups with their generally underperforming Latin American counterparts. The Korean chaebol, for example, are generally portrayed as aggressive and effective agents of that dynamic economy's export‐led strategy, whereas the fragmented family‐based groups of Argentina appear cumbersome and inefficient entities whose viability depended on the protective cloak of important substitution policy. This Handbook, therefore, is intended to fill some of the empirical as well as theoretical gaps in the scholarly literature on business groups, while providing a bridge between past and future examinations of the topic.

Organization of the volume

The variety of economic, political, and sociocultural settings surveyed in the volume's nation‐specific case studies is wide. The world regions covered in the volume range from Asia to Latin America, the Middle East, and Africa. Consistent with a view of business groups as the prototypical large‐enterprise form in such settings, the emphasis is on “late‐industrializing” nations, which achieved a critical path of “modern economic growth” in the twentieth century, especially after the Second World War (Amsden 1989, 2001). Table 1.1 illustrates the impressive rates of growth of several late‐industrializing nations from the early post‐Second World War period to the present. For purposes of comparison, a number of early industrializing nations are included as well. As business groups were integral and critical agents in the late‐industrializing economies represented in Table 1.1, it is hard to avoid the conclusion that they often had a hand in those trajectories of growth.

Given the prominence of business groups in industrializing economies since the early decades of the twentieth century, this volume focuses on the evolution and contributions of that form of economic institution in the context of representative (p. 3) (p. 4) late‐industrializing nations. Business groups of varied types are still influential in the early twenty‐first century in a considerable number of mature industrial nations. In many other such nations, where groups no longer have a significant presence, they were nonetheless important at earlier historical stages. Chapter 3 by Jones and Colpan, for instance, provides an analytical summary of the diversified business groups with pyramidal characteristics organized by British trading houses well into the twentieth century (see also Jones 2000). Chapter 21 by Morck explains the demise of pyramidal business groups in the USA and UK in the 1930s and late 1960s, respectively. Morck sees the Anglo‐American experience as exceptional, however, and finds business groups persisting even today in numerous advanced economies (Morck 2005). That persistence, he argues, derives from path‐dependent historical factors, such that, compared to their emerging economy counterparts, they are less comprehensible in terms of current market conditions.

Table 1.1 Levels of per capita GDP in late and early industrializing economies, 1820–2006 (1990 international Geary‐Khamis dollars)

Country

1820

1870

1913

1950

1960

1970

1980

1990

2000

2006

Japan

669

737

1,387

1,921

3,986

9,714

13,428

18,789

20,738

22,462

South Korea

600

604

869

854

1,226

2,167

4,114

8,704

14,375

18,356

Taiwan

550

550

747

924

1,492

2,980

5,869

9,886

16,835

19,860

China

600

530

552

448

662

778

1,061

1,871

3,421

6,048

Thailand

570

608

841

817

1,078

1,694

2,554

4,633

6,398

8,215

Singapore

683

682

1,279

2,219

2,310

4,439

9,058

14,220

22,518

26,162

India

533

533

673

619

753

868

938

1,309

1,892

2,598

Argentina

N.A.

1,311

3,797

4,987

5,559

7,302

8,206

6,433

8,581

9,679

Brazil

646

713

811

1,672

2,335

3,057

5,195

4,920

5,532

5,835

Chile

694

1,290

2,988

3,670

4,270

5,231

5,680

6,401

10,309

12,516

Mexico

759

674

1,732

2,365

3,155

4,320

6,320

6,085

7,275

7,753

Israel

N.A.

N.A.

N.A.

2,817

4,663

8,101

10,984

13,067

16,172

16,997

Turkey

643

825

1,213

1,623

2,247

3,078

4,022

5,399

6,446

7,717

Russia

688

943

1,488

2,841

3,945

5,575

6,427

7,779

5,277

7,831

South Africa

415

858

1,602

2,535

3,041

4,045

4,390

3,834

3,890

4,543

USA

1,257

2,445

5,301

9,561

11,328

15,030

18,577

23,201

28,467

31,049

Canada

904

1,695

4,447

7,291

8,753

12,050

16,176

18,872

22,488

24,951

Belgium

1,319

2,692

4,220

5,462

6,952

10,611

14,467

17,197

20,656

22,729

France

1,135

1,876

3,485

5,186

7,398

11,410

14,766

17,647

20,422

21,809

Germany

1,077

1,839

3,648

3,881

7,705

10,839

14,114

15,929

18,944

19,993

Italy

1,117

1,499

2,564

3,502

5,916

9,719

13,149

16,313

18,774

19,802

Sweden

1,198

1,662

3,096

6,739

8,688

12,716

14,937

17,609

20,710

24,204

UK

1,706

3,190

4,921

6,939

8,645

10,767

12,931

16,430

20,353

23,013

Source: Compiled from Maddison (2009).

The volume comprises twenty‐eight chapters divided into three distinct parts. Part I provides an overview of the emergence, evolution, and consequentiality of business groups in theoretical, comparative, and historical perspective. Part II contains sixteen chapters, each analyzing a country‐specific pattern of business group organization and behavior. The authors of these chapters examine the degree to which and how the economic, political, and sociocultural arrangements particular to these national settings provided the soil in which groups took root while constraining and channeling the forms they adopted, the paths they followed, and how they meshed with local and international institutions.

Part II's nation‐focused chapters also address the competitive strategic goals and actions of business groups: the economic sectors that spawned them; how they diversified in expanding into new domestic industries as well as international markets and the strategic logic of that diversification. They further take on the all‐important questions of governance: how are ownership and control distributed within groups; what are the consequences in terms of shareholder interest; and the issues of transparency, quality of monitoring, managerial professionalism, and the like. The chapters further investigate the competitive capabilities that business groups in different countries sought and acquired and that enabled them with varying degrees of success to adapt to shifting economic and political environments.

The nation‐specific case studies are followed in Part III by a set of theoretical and comparative treatments of business groups in international perspective. Nine chapters are organized by broad substantive topic. The first three chapters in Part III represent economic analyses of business groups. While sharing a common economics underpinning, those chapters take distinct perspectives on varied facets of business group organization and circumstance such as product portfolio, ownership and governance, and institutional boundaries. The fourth chapter moves to politics and policy, addressing from a political‐economy perspective such often‐sensitive issues as the connection between industrial policy and group diversification strategy and other close cooperation between business groups and the state. The remaining five chapters all concern the internal functioning of business groups, from corporate governance and leadership to strategy and competitive capabilities. The chapters (p. 5) addressing such management and organization questions place particular emphasis on the international perspective, thus placing the unique and country‐specific attributes of groups in broader comparative context.

The diversity of conceptual frames applied in these chapters is a distinguishing feature of this Handbook and, we believe, an important strength. Business groups in emerging economy settings are complex, multifaceted (political and cultural as well as economic) entities. Indeed, it is safe to characterize business groups as socially embedded and molded to a degree considerably greater than that of “M‐form” and other corporate structures in mature industrial economies such as the United States. In most development theory, such embeddedness both explains and reflects inefficiency. Modes of economic organization that are tightly aligned with local institutions and cultures will in general lag behind the efficiency of modes that instead are attuned to worldwide “best practice.” When business groups in developing nations do well in economic terms, is it because they are efficient in the usual economic sense, or is it because they have adapted successfully to a highly localized and idiosyncratic institutional environment? That question comes up repeatedly in these pages.

Varied Definitions of Business Groups

One of the challenges in producing a book on the topic of business groups in a globally comparative context is the diverse use of the term in scholarly writing. Sociologists like Granovetter (1995, 2005) favor a fluid, network conception that highlights the multiplex (many types of ties) and porous organization of groups and their mesh with sociocultural systems. To development economists, groups are a form of big business distinguished chiefly by the technologically unrelated market portfolios characteristic of emerging economies. Khanna and Yafeh's much‐cited review article (2007), for example,  sees groups operating in multiple, often unrelated, markets (see also Khanna and Palepu 1997; Guillén 2000). Finance scholars, in turn, tend to view business groups as a device used by controlling shareholders to disenfranchise and expropriate value from minority shareholders (La Porta et al. 1999; Morck et al. 2005). The iconic business group with a pyramidal structure, wherein a peak shareholder, often a founding family, exercises effective control over a cluster of affiliate companies through a chain of equity ties, is often argued to be an effective mechanism for such expropriation.

Still other definitions and conceptualizations of business groups derive from the conventions of regulatory bodies and economic journalism. In order to guide the reader through the definitional thicket, we summarize in an Appendix to this Introduction all the working definitions employed in the nation‐focused chapters of the Handbook. The use of the term business group in a specific nation (for example, the Chilean case) may emphasize one attribute—for example, the (p. 6) pyramidal form—but not another—for example, unrelated diversification. In a different case (for example, India), unrelated product portfolio is emphasized, while public listing of member companies is not. Still other chapters (for example, on China and Thailand) discount diversified portfolio or pyramidal structure as defining attributes. Loosely structured network‐type business groups that lack a controlling unit at the apex (family, headquarters entity, or holding company) are best represented in the keiretsu groupings that emerged and played important roles in the postwar Japanese economy. Chapter 5 by Lincoln and Shimotani on the postwar keiretsu draws attention, as do some of the conceptual/comparative chapters, to how the horizontal keiretsu (Mitsubishi, Mitsui, Sumitomo, and so on) derived their cohesion from webs of relatively small cross‐shareholdings and occasional executive transfers such that each affiliated firm was somewhat controlled by the group, but no one firm, holding company, or family did much of the controlling.

Such variations in definition do not, however, mean that the cross‐national study of business groups necessarily devolves to a survey of altogether unique and dissimilar cases. While readers of these pages will indeed encounter variety in how groups are defined and how they compare to other modes of business organization, the contributors of our nation‐focused chapters share a broad understanding of groups as clusters of coordinated activities carried out by interlinked but legally independent enterprises. The “legal independence” of a business group's constituent companies is a definitional criterion on which general agreement exists. Hence, a large corporation's internal product or market divisions do not constitute a “group” in this sense, as they stand collectively as a single corporate entity.

Another commonality across our chapters is the focus on the largest business groups in each of the national economies considered. It is the distinguishing features and impact of large groups that in most observers' minds define this particular economic institution. While a restriction of the Handbook's purview risks neglecting some examples of the form that might be interesting and warrant attention, this narrowing of focus seems justified. First, as noted, large groups are the conspicuous and consequential ones and thus those to which scholarly, policy, and journalistic attention is mostly paid. Secondly, several important, even definitive, attributes of business groups are highly correlated with size. Only groups above a certain scale, for example, can encompass a significant number of companies, each of which is itself of reasonable size and often publicly listed; can be widely diversified; can be organized in tall pyramids or bound together by cross‐shareholdings; will be noteworthy for their market power, relations with the state, and so on. The very concept of a “business group,” then, would seem to imply a relatively large cluster of well‐established, legally independent affiliated companies.

Colpan and Hikino (Chapter 2, this volume) deal at greater length with the definitional and conceptual labyrinth that surrounds the topic of business groups. They provide a taxonomy identifying distinct business group forms and distinguishing them from such other organizational forms as the multidivisional and conglomerate types that have drawn so much attention in the business academic literature on advanced industrial economies.

(p. 7) The Viability of The Business Groups

Because of their identification with emerging markets but also because their ownership, governance, and other organizational features appear to outside observers personalistic and opaque, business groups are often criticized as inefficient, sometimes corrupt, “crony capitalist” institutions. For some realizations of the form, the negative reviews are certainly deserved. Yet, thanks to some new strains of organizational theory and recent empirical research, more and more observers have come to see business groups playing useful roles especially in economic systems that have yet to acquire the well‐functioning markets and supportive institutions critical to efficient capitalist economies.

What specifically is it about business groups that explain the part they seem to play in economic growth? An answer offered frequently by the authors of this Handbook is that business groups internalize functions for which no external market or supporting institution exists. An even larger role in the advancement of those economies is suggested by Morck's chapter: business groups, largely via their broadly diversified investments, supply the “Big Push” that a developing economy requires in order to jump start its industry sectors and move them simultaneously up trajectories of growth. While, in most cases, extreme and unrelated diversification has been shown an unprofitable and dysfunctional strategy when practiced by large corporations in mature economies, it appears to pay systemic (as well as company‐level and group‐wide) dividends in emerging markets.

If market imperfection explains the emergence and growth of diversified business groups, as most scholars recognize, the global shift since the 1980s toward liberalized markets and more accountable governance practices should, by this logic, undermine the groups' raison d'être. Business groups of pyramidal variety are unlikely to thrive in the presence of accounting and regulatory supervision that demands transparency and safeguards against abuses such as the “tunneling”—expropriation of minority shareholder wealth—often attributed to business groups. Economic maturation thus breeds an environment conducive either to the wholesale demise of the business group form or, short of that, to the focusing of their portfolios, the simplification of their ownership networks, and the professionalization of their boards and executive teams. As business groups are frequently cast as a kind of immature or emergent multidivisional “M‐form” corporate organization, it is useful and interesting to speculate on their possible evolution into that form, as defined by related diversification, internal divisionalization, and professional control in the service of long‐term strategic goals (Chandler 1977, 1990).

However, the evidence that business groups the world over have been undergoing such simplification, focusing, or at the extreme, total collapse is on the whole scant. Major groups lacking those attributes do not appear to be unraveling or otherwise becoming less important to their national and regional economies. One might suppose that the rising global pressures over recent decades for economic liberalization and, especially, the financial stresses and economic turbulences since the 1990s (p. 8) would have eroded the institutions supporting business groups in those regions. While several groups in particular countries did decline and even disappear (for example, the Daewoo chaebol in Korea), for the most part the developing world's groups survived such selection pressures and emerged largely unscathed and sometimes even strengthened. For example, offsetting Daewoo's demise following the 1997 Asian financial crisis and the International Monetary Fund's draconian reforms was the re‐emergence of the Samsung and Lucky‐Goldstar (LG) groups as reinvigorated global competitors.

The persistence and continuity of business groups around the world suggest strongly that this distinctive form of business organization cannot be reasonably reduced to a second‐best functional substitute for the Anglo‐American multidivisional enterprise and therefore may move down its own unique evolutionary path. Nor is the groups' general adaptability in emerging economies easily dismissed as symptomatic of those countries' premodern and crony‐esque institutional environments. Even in some advanced economies, pyramidal business groups have survived in the presence of investor protections that effectively prevent the “tunneling” of wealth from minority to controlling shareholders. Moreover, while business groups are often accused of surviving on political rents (which, indeed, they are often well positioned to extract), the evidence presented in the chapters to follow is that, depending on the type of group, the stage of development, the region, and so on, the rents that groups seek and extract are mostly of the economic sort. When groups enjoy extraordinary returns, the reasons, as suggested by the authors of many of our chapters, lie in the competitive capabilities in which they invested. While generalizations of this sort are always hazardous, the thrust of the evidence that the authors of this volume have garnered is that in many instances business groups have successfully adapted, not only to the political and cultural realities of the countries in which they are located, but to the economic realities, local, regional, and global, as well. Those capabilities and adaptations in large measure constitute the subject matter of this Handbook.

References

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(p. 10) (p. 11) (p. 12)

Appendix: Working definitions and analytical coverage of business groups in individual national economies

Nations

Definition

Prewar Japan

“[A] set of legally independent firms that were wholly or partly owned by a holding company or a parent firm.” They had family‐led characteristics in that family or entrepreneurs kept effective control, and were diversified into multiple sectors. (Chapter authors' definition.)

Postwar Japan

“[A cluster] of independently managed firms whose intertwined activities were reinforced by governance mechanisms such as presidents' councils, partial cross‐ownership, and personnel exchanges.” (Chapter authors' definition.)

South Korea

“[A] set of firms which, though legally independent, are bound together by a constellation of formal and informal ties and are accustomed to taking coordinated action” (Khanna and Rivkin 2001: 47–8). In principle, any organization with more than two affiliated firms can be classified as a business group. (List of groups comes from Korean Fair Trade Commission.)

Taiwan

“[A] coherent business organization including several legally independent enterprises.” Database is constructed by examining interorganizational relationships such as shared identity, cross‐shareholding, and interlocking directorates among firms. (Biennial directory, “Business Groups in Taiwan,” compiled by China Credit Information Service in Taipei.)

China

“[A] collection of legally independent entities that are partly or wholly owned by a parent firm and registered as affiliated firms of that parent firm…the core company of a business group in China, qiye jituan, should have a registered capital of over 50 million yuan plus at least five affiliated companies, and the business group should have a total registered capital (including the core and other affiliated companies) of over 100 million yuan.” (The National Statistics Bureau of China (NSBC), and State Administration for Industry and Commerce.)

Thailand

“[A] business organization that owns and operates two or more firms under single ownership (particular family, corporate, or state‐sponsored company). The fact that a listed company is included in a group is not essential to this definition.” (Chapter authors' definition and compilation.)

Singapore

“[A] set of legally separate firms linked together in formal and/or informal ways.” (Chapter authors' definition adopting Granovetter 2005; own compilation.)

India

“[A]n agglomeration of privately held and publicly traded firms operating in different lines of business, each of which is incorporated as a separate legal entity, but which are collectively under the entrepreneurial, financial, and strategic control of a common authority, typically a family, and are interlinked by trust‐based relationships forged around a similar persona, ethnicity, or community.” (Chapter author's definition, based on various sources, including the corporate database Prowess.)

Argentina

A business entity that owns and operates two and more firms under the single ownership, that are “(1) family owned, in that a family (or a group of families) has the power to make strategic decisions; (2) large, in that they have revenues above US$100 million (as per the exchange rate of 2007); and (3) diversified, as the firms integrating each business group are either involved in more than one industry or have a predominant role in a business to which activities belonging to different links in a single value chain are associated.” (Chapter authors' definition and compilation.)

Brazil

“[A] group of firms that, in addition to being strictly controlled by the same entity, either embraces at least one listed firm (what we call a ‘listed‐firm business group’) or is diversified into at least three industries (what we dub a ‘diversified business group’).“(Chapter authors' definition. List of groups comes from Valor Grandes Grupos, a report annually published by the Brazilian business‐specialized newspaper Valor Econômico.)

Chile

“[T]wo or more listed companies that are controlled by the same shareholder (or group of shareholders), even when one of the companies is just an investment company holding shares of a single operating firm.” (The Chilean Superintendence of Securities.)

Mexico

A constellation of “large companies that are under the common control of an owner family [often forming] a hierarchical shareholding structure with a holding company at its apex that is generally listed on stock exchanges.” (Chapter author's definition and compilation.)

Israel

A set of firms “where at least three public companies are controlled by the same (ultimate) shareholder.” (Chapter authors' definition and compilation.)

Turkey

An agglomeration of “legally independent, privately held and publicly owned, companies operating in multiple industries, which are controlled through a top holding company with various equity and non‐equity arrangements.” (Chapter author's definition based on Khanna and Yafeh 2007 and Colpan and Hikino 2008; own compilation.)

Russia

“[L]egally independent firms linked together in formal and informal ties.” Whether a listed company is included in a group or not is not essential in the definition taken in this chapter. (Chapter author's definition adopting Khanna and Yafeh 2007. List of groups is based on World Bank 2004.)

South Africa

Group of firms “where two or more listed companies are controlled by the same ultimate shareholder.” (Chapter author's definition and compilation based on McGregor, Who Owns Whom in South Africa.)