Do Foreign Investments Benefit Business Group Affiliated Firms? Empirical Evidence from India

Abstract

Business groups are the prevalent governance form in emerging markets. Since diversified business groups frequently act as a substitute for missing institutions in less developed countries, a general consensus among institutional economists exists that group affiliation is beneficial to firms in the home market. It is yet unclear, however, whether firms can translate benefits derived from group membership to the international context. This research investigates whether or not it is advantageous for multinational enterprises to be part of a business group. Specifically, this study examines globalization strategies of group affiliated firms such as their mode of entry selection and their foreign location choice. Using hierarchical linear modeling on a sample of 197 Indian firms which are part of 96 business groups, we find that business group membership is generally harmful to multinational activity. However, if increasing globalization and market liberalization was to drive affiliated firms into international marketplaces, then they should at best invest in developed markets via partially-owned establishments.