Financial and organizational perspectives on small and medium-sized business groups

Most theories seeking to explain why business groups are formed are focused on large firms, but in recent years there is growing interest on why business groups are formed in the small firms sector. In this paper we contrast two theoretical perspectives that may account for business group formation, both based on the idea that business groups allow entrepreneurs to differentiate the ownership structure of new activities from the established one(s). These are the financial perspective and the organizational/entrepreneurial perspective. Theoretical propositions derived from these perspectives are tested using data on Italian business groups. The empirical results show that the financial and the organizational perspectives can be seen as complementary in explaining business groups in the small business sector. Specifically, the financial explanation is in accordance with the data in predicting the prevalence of capital intensive firms in business groups while the organizational explanation is in accordance with the data in predicting the presence of knowledge intensive firms in business groups. Furthermore, the organizational perspective seems more appropriate when the diversification strategies of business groups are concerned and when explaining the ownership structure of controlled companies.