Diversified Business Groups in the West: History and Theory

Diversified business groups, which are the amalgamation of legally-independent firms connected to each other by equity and non-equity ties that are active in unrelated business fields, have been the representative form of large enterprises in contemporary developing economies. In contrast, developed economies have been mostly associated with Chandlerian multidivisional enterprises with relatively specialized industry portfolios. In our recent paper, we show that diversified business groups have actually existed for a long time, and continue to prosper as an effective form of large business organization in several developed economies. Our paper examines the historical origins, evolutionary paths and long-term resilience of diversified business groups in contemporary developed economies of Western Europe, North America and Oceania. Ultimately, we aim to develop a new theoretical understanding of diversified business groups and other comparable models of corporate organizations by broadening the analytical perspectives of earlier approaches in terms of longitudinal and geographical scope.

Our paper suggests that diversified business groups are not simply transitionary organizations that effectively function only at the early phase of modern economic growth. We argue that they do not necessarily become an obstacle for dynamic development as individual economies mature. Our findings suggest that the basic theoretical assumption in development economics of a straightforward association between market immaturity and institutional voids, and the burgeoning of diversified business groups, is rather incomplete in reality. We argue that broad and diverse exogenous factors, specifically the idiosyncrasy of political institutions as well as of capital markets, actually play critical roles in shaping the basic course of the long-term development of business groups. We suggest that those exogenous factors have at times nurtured the development of business groups. Yet, our findings also show that these same factors have also, ultimately, turned into powerful agents to dismantle diversified business groups. In particular, capital markets, especially the changing investor ideology adopted by the institutional investors since the 1980s have worked to break-up the very groups that they once hailed. 

While the market immaturities and institutional voids that business groups exploit in developing economies diminish as the economies develop, those business groups co-evolve with the institutional structure and adapt to fit into the new environmental context. In order to understand the resilience, as well as effectiveness, of the corporate model of diversified business groups, then, a decisive factor remains inside the group itself, namely the competitive resources, capabilities and administrative mechanisms within the group as well as their ownership structures. Hence, we argue that business groups are living entities and as they flexibly transform themselves as an effective corporate organization, they can continue to be viable mechanisms for economic growth even in developed economies.

Asli M. Colpan is an Associate Professor and Takashi Hikino is an Adjunct Professor at the Graduate School of Management and Graduate School of Economics, Kyoto University.