Product Market Development and Business Group Affiliation Value: Evidence from an Emerging Market

In this paper, we attempt to understand whether business group affiliation continues to create value with improvements in institutional environment, especially with increased product market competition. This question comes at a time when there is growing awareness that business groups dominate product markets even in developed economies (Boutin et al., 2013) and their existence is not limited to poor institutional environments (Khanna and Palepu, 2000). We exploit an exogenous regulation in India that aims to penalize anti-competitive practices of complex business structures akin to business groups. Using around 36,500 firm year observations, spanning 23 years, we find that business group affiliation value diminishes with improvements in product market environment. The effect is more significant for business groups that diversify through vertical integration. However, business groups with deep pockets continue to sustain value creation, indicating their aggressive strategies that restrict new entrants (Boutin et al., 2013).