Business groups and corporate governance in emerging markets

Abstract

This chapter addresses the aspects of corporate governance specific to emerging markets, with a particular interest in governance framework within business groups. Business groups represent the dominant form of large business organizations in emerging markets around the world. In their respective national economies, business groups contribute greatly to GNP, they own a large proportion of national assets and they employ a significant percentage of the national workforce (Chung, 2005; Carney, 2008; Khanna and Rivkin, 2001). Despite the importance of groups to many national economies, research on this phenomenon is still fragmented. Broadly defining business groups as “collections of firms bound together in some formal and informal ways” (Granovetter, 1995: 454), scholars still debate groups’ origins, their developmental paths and the effects of group affiliation on member firms. The portion of business group literature related to the specifics of governance mechanisms, cost and conflicts is relatively small, but growing. A review of strategy-related issues in emerging economies (Hoskisson et al., 2000) has demonstrated a variety of theoretical perspectives in the studying of patterns of corporate governance. There are a number of studies on governance issues in newly industrialized markets (Khanna and Palepu, 2004; Phan, 2001; Young et al., 2004) and in transition economies (Filatotchev et al., 2003; Wright et al., 2003). There are studies addressing corporate governance as an issue for national business policy (Carney, 2004) or as governance convergence-divergence globally (Khanna and Palepu, 2004). In the context of interactions between the local business logic of emerging countries and global strategies of multinational enterprises (MNEs), business groups represent the essence of complexity MNEs face in entering developing countries. As the largest, strongest and most reputable players in their national markets, business groups become both partners and rivals for MNEs operating in emerging economies (Carrera et al., 2003). To be competitive in emerging economies, MNEs need to understand the specifics of local business systems,including decision making, strategic motives of economic actors, societal pressures, etc. In terms of firm behavior they should be aware of potential costs and conflicts related to firm governance in less structured institutional environments. MNEs should be ready to adjust their approach to effective firm management to blend into their new and very different business environment. Understanding models and principles of corporate governance relevant to large, diversified business groups will help MNEs to assess the direction and magnitude of the adjustments in their governance system required to succeed in emerging economies. What specific features of business groups are reflected in the corporate governance in emerging markets, and what are the implications for MNEs entering these markets? The answer to these questions is based on a synthesis of findings from prior research on business groups’ origins, conduct and change. Agency and institutional theories together provide an integrated perspective for analyzing corporate governance at the firm and the country level. Agency theory helps in approaching the internal environment for corporate governance, including tensions, costs and management tools related to the specific ownership configuration of business groups. Institutional theory brings to focus external pressures that shape firm behavior in emerging markets. This chapter seeks to contribute to a better understanding of the characteristics of corporate governance in business groups. It also aims to shed light on the complexity of interactions among the elements of governance in emerging markets. The conceptual model presented in this chapter illustrates the process of formation of corporate governance in emerging markets. This model illustrates how the interactions among input factors (concentrated ownership and state activism) and formal and informal institutional relationships shape the governance system. To answer the research questions stated above, this chapter begins with an introduction to the topic of corporate governance. The second section reviews corporate governance in light of agency perspective and internal mechanisms of governance in business groups. The third section looks at the institutional context of governance in emerging economies. The chapter concludes with a conceptual model of corporate governance in emerging markets.