Performance of Indian business groups: Effect of ethnicity

Abstract

Indian business groups (IBGs) have made their presence felt in all spheres of the economy and are extensively studied, yet very little is known about the differences amongst them. The existing literature attempts to study their behavior and trends as a whole but does not provide for any distinction between them on any parameters. We contend that, though the reasons for survival and persistence of IBGs may be similar, their behavior varies on the basis of the ethnicity of the founding family. In doing so, we develop hypotheses about the impact of ethnicity on the level of diversification of an IBG in the context of an institutional transition, that is, the reforms of 1991. Using a balanced data set of the top 47 business groups in India, we tested for this effect while controlling for variables like group operating base, age of the group, number of generations of the founding family involved, average turnover and market capitalization. Parametric tests of this sample revealed that there were indeed significant differences between business groups of different ethnic origins. Business groups belonging to North and West India were found to be more diversified than those belonging to South and East India. Further, this difference in the level of diversification was significant pre-1991 but has decreased post-1991, that is, South-East (S-E) business groups have caught up with the North-West (N-W) business groups post-1991. To explain these trends, we explored four elements, differential levels of which may have an impact on the diversification of a business group. First, the N-W business groups had higher lobbying power with the government than S-E business groups, as seen in the cases of Ambani, Bajaj, Modi and Tata. This advantage was essential pre-liberalization because of the stifling controls on the industry and License Raj but has decreased in significance since. Second, on studying the extent of debt leverage of N-W and S-E business groups for 14 years, we found that while the S-E groups had a lower D-E ratio for the first 2 years, their ratio surpassed that of the N-W groups soon after and has consistently stayed higher. This increased procurement of funds which the S-E groups could now employ in their businesses led to them diversifying into new industries post-liberalization. Third, N-W business groups had a greater access to capital as compared to S-E business groups preliberalization. This is indicated by the capex requirements of the sectors that the two categories have ventured into. It was found that N-W groups’ diversification into high capex sectors as compared to that of S-E groups had decreased post-1991 while their diversification into low capex sectors had increased post-1991. Finally, on analyzing the nature of diversification, we found that while in the pre-liberalization era, the tendency to venture into unrelated lines of business was more, post-liberalization, all S-E groups in the sample exhibited a greater degree of relatedness as compared to their N-W counterparts. Overall, our findings suggest that though N-W groups had an advantage over S-E groups preliberalization because of their greater lobbying power and easier access to capital, this advantage no longer exists post-liberalization. Thus, the adoption of a risk-taking approach towards debt leverage and higher access to capital has enabled S-E business groups to diversify more into high capex sectors. However, they are treading cautiously as they have primarily ventured into sectors related to their existing businesses.