Why do business groups continue to matter? A study of market failure and performance among Indian manufacturers

This paper explores the nature of the influence that business groups exert in shaping performance outcomes in emerging economies. Set in India, this study used a longitudinal research design to assess the independent and collective performance impact of group affiliation and diversification both before and after economic reforms were introduced in the country. Consistent with the institutional theory perspective, results show that in the pre-reform period the group structure exerted an important positive moderating effect on the diversification-performance relationship. However, these group benefits appear to persist even after many of the sources of market failure had started to decline rapidly. This persistence of group effect may be indicative of the continued relevance of non-diversification benefits of the group structure in emerging economies. It may also be indicative of the fairly slow process of building institutional infrastructure in emerging economies where reforms are seldom introduced en masse but more a series of continuing measures as was the case in India.