A Tale of Two Levels: Diversification of Business Groups

Typical business groups are widely diversified into unrelated industries. Scholars have explained this as a consequence of institutional weaknesses and predicted that business groups would lose their effectiveness and increasingly refocus as institutional environments improve.

In this dissertation, I suggest a new perspective on business groups by revisiting their hybrid nature and focusing on the fact that two different boundaries exist for business group member firms. I differentiate between group-level diversification and firm-level diversification and argue that they serve different purposes, which lead to divergent patterns of diversification.

First, at the business group level, I question the appropriateness of applying the concept of relatedness to the diversification of a business group. Emphasizing the hybrid nature of the business group, I argue that its purpose of diversification may be more to provide the group?s member firms with critical resources than to obtain synergies from operating in related industries. Relying on the insights from the input-output model, I propose the idea that business groups are more likely to enter industries that have linkages to multiple other industries than to follow the relatedness criterion. I test the idea using the data of 30 major South Korean business groups? diversification from 1999 to 2008 and find an empirical support.

Second, at the member firm level, I focus on the importance of group-level characteristics on member firms? diversification choices. Emphasizing economic incentives, I propose that the business group structure and relationships within it affect its member firms? strategic orientation and choices in ways that may satisfy the needs of both the controlling shareholders and minority shareholders. I theorize that the size, the degree of diversification, and the proportion of intragroup transaction of a business group would affect diversification choices of its member firms. Based on the data of 108 public member firms of 30 major South Korean business groups, I find empirical support for most of my hypotheses.

The implication of my dissertation is that the business group may be not just a coping mechanism for underdeveloped institutions, but an organizational innovation that can work in any institutional environment.