Diversified Business Groups and Corporate Refocusing in China and Other Emerging Economies Robert E. Hoskisson Arizona State University

Business Groups: Costs and Diversification Costs Diversification Transaction Costs Organization Costs

Business Groups: Reduced Overall Transaction Costs Costs Diversification Transaction Costs Organization Costs

Issues that Influence Refocusing External shocks such as a currency crisis More active takeover market Mass privatization policies Business groups may be protected from competition because of market power in key industries Business groups operating within countries which emphasize relational norms Business groups exhibiting poor performance Business groups with higher top management team turnover Business groups that exhibit lower levels of trust

Mismatch between diversification strategy and structure Diversification Headquarters Influence unrelated related decentralizedcentralized Unrelated Firm Chaebols Related Firm Korean Chaebols

Organization Costs and Diversification Costs Diversification Transaction Costs Organization Costs

Ownership Type Related Restructuring Unrelated Restructuring Family Other Financial Institutions Foreign Bank Government Ownership Incentives for Refocusing Toward More Related Versus Unrelated Diversification

How will Business Groups Evolve in China? Will groups move toward loosely coupled networks? Will groups move toward centrally controlled multidivisional structures (M-forms)? What will be the trade offs in regard to corporate entrepreneurship? With whom will they be competing? –Developed economy firms –Other emerging economy firms

Entrepreneurial Diffusion Business Groups (Networks) Emerging Developed Imitation and Diffusion in Emerging Economies Versus Developed Economies

Entrepreneurial Intensity Corporate Organization (M-form) Developed Emerging Corporate Entrepreneurship in Emerging Versus Developed Economies

How will Groups Refocus and What will be the Effect? Quality of innovations-imitation versus new innovations-Apple iPod Effect of government intervention on other business group behaviors such as firm growth or internationalization Are the relationships observed in China’s transition economy also present in other economies which are similar in transition? Will a concern for social stability impede the momentum of the institutional transition toward a more market-based economy?

Study Results Study results suggest that Chinese business groups do play an important role in managing the tension –between old and new institutions –between forces pressing for a forward-looking orientation (focused on corporate entrepreneurship) and those focused on a backward-looking orientation (focused on high levels of employment) Mixed results on how BGs manage the impacts of government influence on BG behavior may indicate that interaction effects between government influence and organizational influence exist. interaction effects interaction effects

Corporate Entrepreneurshi p R&D expenditure Market development New product introduction Managerial Mindset -0.10*** Government Ownership -0.16*** Strategic Control -0.08* Financial Control 0.26*** Interdependence 0.06* SOCIOLOGICAL INSTITUTIONAL THEORY RATIONAL CHOICE THEORY Government Employment Policy 0.02 N = 1,038. Path coefficients shown are standardized. χ² = , df = 323, p <.001. NFI =.90, CFI =.91, IFI =.91, RMSEA =.07. *** p≤.001, ** p≤.01, * p≤.05, † p≤ ** Group Culture Control Variables Path Coefficients Employment (ln) 0.20 *** Debt 0.00 Return on assets 0.13 *** Turnover 0.02 Group tenure Industry competitiveness 0.05 † Group age 0.02 Group product diversity 0.04 Group geographic depression Foreign ownership 0.01 Results on Theoretical Model

Post-hoc Analysis ◄

Refocusing and Internationalization As groups reduce diversification, will they substitute product diversification for international diversification? Group sharing of resources –Group membership may relax liquidity constraints in pursuing international diversification due to internal market operations Group knowledge sharing –Benefit from the experience of other group members compared to independent firms Group-affiliated firms in the same region are natural candidates for foreign business alliances that may be necessary for critical mass