Business groups are observed everywhere except in the U.S. and U.K.; their global presence is widely acknowledged. The most successful explanation for this preponderance has been based on the relative efficiency of business groups’ internal market vis-à-vis the external market conventionally observed in underdeveloped or emerging economies. Unsurprisingly, this view cannot explain why business groups also prosper in advanced economies where their internal market is thought to no longer match efficient external markets. This study addresses this contradiction by drawing attention to non-tradable, intangible assets and putting forward an institution-free, micro-level explanation. Specifically, we reason that the external market for organizational capabilities is bound to be missing regardless of institutional advancements and economic development due to human beings’ innate cognitive limits and information and behavioral uncertainties, while business groups’ internal markets may overcome these limits via their distinctive organizing mechanism underpinned by group identity, solidarity, mutual trust, shared organizational architecture, and enhanced communicability. In other words, business groups can outperform the external market in coordinating and facilitating exchanges of non-tradable assets and organizational capabilities in particular that are becoming increasingly crucial for successful competition. Using panel data of large business groups in Korea during the periods between 2003 and 2016, we confirm that affiliation with business groups and accessing their internal market enhances technological capability. Thus, this study extends our understanding of business groups beyond the institution-based explanation.
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