Strategic Allegiance in Business Groups: Differential Role of Interlocks

Abstract

There has been a renewed interest in the performance of business groups in the recent past. Yet, the strong sense of social identity in business groups indicates that affiliate firms could prefer to follow the strategy of the overall group rather than chart a path of their own, regardless of performance implications. Terming this phenomenon as strategic allegiance, we seek to understand the determinants of the same. As board of directors of a firm sets its overall strategic direction, and as directors of different boards usually interact via interlocks, we investigate the role of interlocks in this strategic change. Business group structure provides for distinct legal entities with separate boards – this implies that interlocks for a firm can happen with other constituent firms of the same business group. Terming such interlocks as internal interlocks and all other interlocks as external interlocks, we hypothesize that firms with higher number of internal interlocks display a higher strategic allegiance due to being strongly embedded within the group and hence not deviating from the strategy of the overall group. We find support for the same and conclude with resultant implications for future research.