Evolution of Indian business groups and its implications for diversification strategy

Abstract

Introduction:- Business Groups have been a widely prevalent organizational form in the developing world. They have been known to add value to the affiliate group firms by overcoming the limitations of institutional gaps that exist in these emerging economies. Contrary to belief however,this organization form enjoys continued popularity even after progress of economic and corporate policies in these countries. New groups are being formed and old business groups continue to retain their status. This becomes an interesting dichotomy that warrants an in-depth longitudinal analysis of the evolution of these organizations, the changes in their governance structures as well as the legacy issues at play. This paper aims to bridge the gap in research by examining the correlation between age of an enterprise and the choice of organization. It introduces the M-form of organization into the set and examines the firms that prefer it over the “business group” form. It also aims to study the correlation between choice of organization form (business group or conglomerate) and the potential for sustainability and survival. Motivation:- With the economic liberalization of India post 1991, institutional voids have been overcome to the extent that questions the very reason for existence of business groups. Yet, business groups continue to exist and thrive. Through this paper, we hope to map and analyse the distribution of Indian business groups over time divided across three stages of Indian economic and business history – (i) 1947 – 1969 (post-independence before bank nationalization) (ii) 1970 – 1991 (post bank nationalization until the 1991 reforms) (iii) 1991 – Present (post 1991 reforms). We hope to understand the reasons that yield legitimacy to the formation and very existence of business groups, and their relative advantage, if any, over independent companies, and conglomerates. Hypothesis:- Age has a correlation with the distribution of business groups over time i.e. we expect the density of business houses (mapped according to their founding year) to decrease with time from 1947 to now. There is a long tail that exists in the case of business groups in India, and consolidation offers merit in terms of superior profitability, sound governance, and opportunity for unrelated diversification. Methodology:- This paper will borrow from a blend of primary and secondary research. The key secondary source upon which we aim to build and extend the findings of this paper is a paper titled Beyond Institutional Voids: Business Groups, Incomplete Markets, and Organizational Form (Manikanandan & Ramachandran, 2015), which laid out scope for future research into the evolution of these organizations over the years to gain an understanding of their growth and sustenance. For the primary research, we have leveraged CMIE’s Prowess database to identify the business groups in India (CMIE categorization). Thereafter we mapped the said business groups on the aforementioned economic timeline and aimed to determine whether there is sufficient evidence in favour of consolidation.