Advanced Search
MyIDEAS: Login

Business Groups as Hierarchies of Firms: Determinants of Vertical Integration and Performance

Contents:

Author Info

  • Carlo Altomonte

    (Bocconi University and FEEM)

  • Armando Rungi

    (Bocconi University and FEEM)

Abstract

We explore the nature of Business Groups, that is network-like forms of hierarchical organization between legally autonomous firms spanning both within and across national borders. Exploiting a unique dataset of 270,474 headquarters controlling more than 1,500,000 (domestic and foreign) affiliates in all countries worldwide, we find that business groups account for a significant part of value-added generation in both developed and developing countries, with a prevalence in the latter. In order to characterize their boundaries, we distinguish between an affiliate vs. a group-level index of vertical integration, as well as an entropy-like metric able to summarize the hierarchical complexity of a group and its trade-off between exploitation of knowledge as an input across the hierarchy and the associated communication costs. We relate these metrics to host country institutional characteristics, as well as to the performance of affiliates across business groups. Conditional on institutional quality, a negative correlation exists between vertical integration and organizational complexity in defining the boundaries of business groups. We also find a robust (albeit non-linear) positive relationship between a group's organizational complexity and productivity which dominates the already known correlation between vertical integration and productivity. Results are in line with the theoretical framework of knowledge-based hierarchies developed by the literature, in which intangible assets are a complementary input in the production processes.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.feem.it/userfiles/attach/20134161620584NDL2013-033.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2013.33.

as in new window
Length:
Date of creation: Apr 2013
Date of revision:
Handle: RePEc:fem:femwpa:2013.33

Contact details of provider:
Postal: Corso Magenta, 63 - 20123 Milan
Phone: 0039-2-52036934
Fax: 0039-2-52036946
Email:
Web page: http://www.feem.it/
More information through EDIRC

Related research

Keywords: Production Chains; Hierarchies; Business Groups; Financial Development; Property Rights; Vertical Integration; Corporate Ownership; Organization of Production; Productivity;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Marin, Dalia & Thierry, Verdier, 2007. "Power in the Multinational Corporation in Industry Equilibrium," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 209, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  2. Ali Hortacsu & Chad Syverson, 2009. "Why Do Firms Own Production Chains?," Working Papers 09-31, Center for Economic Studies, U.S. Census Bureau.
  3. Raghuram G. Rajan & Luigi Zingales, 1996. "Financial Dependence and Growth," NBER Working Papers 5758, National Bureau of Economic Research, Inc.
  4. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
  5. Pol Antras & Elhanan Helpman, 2003. "Global Sourcing," Harvard Institute of Economic Research Working Papers 2005, Harvard - Institute of Economic Research.
  6. Gene M. Grossman & Elhanan Helpman, 2002. "Managerial Incentives and the International Organization of Production," Harvard Institute of Economic Research Working Papers 1987, Harvard - Institute of Economic Research.
  7. Gene M. Grossman & Elhanan Helpman, 2002. "Integration Versus Outsourcing In Industry Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 85-120, February.
  8. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Altomonte, Carlo & di Mauro, Filippo & Ottaviano, Gianmarco & Rungi, Armando & Vicard, Vincent, 2012. "Global value chains during the great trade collapse: a bullwhip effect?," Working Paper Series 1412, European Central Bank.
  10. Heitor V. Almeida & Daniel Wolfenzon, 2006. "A Theory of Pyramidal Ownership and Family Business Groups," Journal of Finance, American Finance Association, vol. 61(6), pages 2637-2680, December.
  11. Francine Lafontaine & Margaret Slade, 2007. "Vertical Integration and Firm Boundaries: The Evidence," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 629-685, September.
  12. Luis Garicano & Esteban Rossi-Hansberg, 2006. "Organization and Inequality in a Knowledge Economy," The Quarterly Journal of Economics, MIT Press, vol. 121(4), pages 1383-1435, November.
  13. Andrew F. Newman & Laura Alfaro & Paola Conconi & Harald Fadinger, 2011. "Trade Policy and Firm Boundaries," Boston University - Department of Economics - Working Papers Series WP2011-035, Boston University - Department of Economics.
  14. Antras, Pol, 2003. "Firms, Contracts, and Trade Structure," Scholarly Articles 3196328, Harvard University Department of Economics.
  15. Nick Bloom & Raffaella Sadun & John Van Reenen, 2009. "The Organization of Firms Across Countries," CEP Discussion Papers dp0937, Centre for Economic Performance, LSE.
  16. Nathan Nunn, 2007. "Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade," The Quarterly Journal of Economics, MIT Press, vol. 122(2), pages 569-600, 05.
  17. Oliver Hart & Bengt Holmstrom, 2008. "A Theory of Firm Scope," NBER Working Papers 14613, National Bureau of Economic Research, Inc.
  18. Philippe Aghion & Richard Holden, 2011. "Incomplete Contracts and the Theory of the Firm: What Have We Learned over the Past 25 Years?," Journal of Economic Perspectives, American Economic Association, vol. 25(2), pages 181-97, Spring.
  19. Lorenzo Caliendo & Esteban Rossi-Hansberg, 2012. "The Impact of Trade on Organization and Productivity," The Quarterly Journal of Economics, Oxford University Press, vol. 127(3), pages 1393-1467.
  20. Antràs, Pol & Rossi-Hansberg, Esteban, 2008. "Organizations and Trade," CEPR Discussion Papers 6965, C.E.P.R. Discussion Papers.
  21. Daron Acemoglu & Simon Johnson & Todd Mitton, 2009. "Determinants of Vertical Integration: Financial Development and Contracting Costs," Journal of Finance, American Finance Association, vol. 64(3), pages 1251-1290, 06.
  22. Acemoglu, Daron & Antras, Pol & Helpman, Elhanan, 2007. "Contracts and Technology Adoption," Scholarly Articles 3199063, Harvard University Department of Economics.
  23. Granovetter, Mark, 1995. "Coase Revisited: Business Groups in the Modern Economy," Industrial and Corporate Change, Oxford University Press, vol. 4(1), pages 93-130.
  24. Gene M. Grossman & Elhanan Helpman, 2002. "Outsourcing versus FDI in Industry Equilibrium?," Harvard Institute of Economic Research Working Papers 1965, Harvard - Institute of Economic Research.
  25. Stefania Vitali & James B. Glattfelder & Stefano Battiston, 2011. "The network of global corporate control," Papers 1107.5728, arXiv.org, revised Sep 2011.
  26. Luis Garicano & Thomas N. Hubbard, 2007. "The Return to Knowledge Hierarchies," NBER Working Papers 12815, National Bureau of Economic Research, Inc.
  27. Michael D. Whinston, 2001. "Assessing the Property Rights and Transaction-Cost Theories of Firm Scope," American Economic Review, American Economic Association, vol. 91(2), pages 184-188, May.
  28. Nick Bloom & John Van Reenen, 2010. "Why do Management Practices Differ Across Firms and Countries?," CEP Occasional Papers 26, Centre for Economic Performance, LSE.
  29. Luis Garicano, 2000. "Hierarchies and the Organization of Knowledge in Production," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 874-904, October.
  30. Raghuram G. Rajan & Luigi Zingales, 2001. "The Influence of the Financial Revolution on the Nature of Firms," NBER Working Papers 8177, National Bureau of Economic Research, Inc.
  31. Kumar, Krishna B & Rajan, Raghuram G & Zingales, Luigi, 1999. "What Determines Firm Size?," CEPR Discussion Papers 2211, C.E.P.R. Discussion Papers.
  32. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
  33. Williamson, Oliver E, 1971. "The Vertical Integration of Production: Market Failure Considerations," American Economic Review, American Economic Association, vol. 61(2), pages 112-23, May.
  34. George Baker & Robert Gibbons & Kevin J. Murphy, 2001. "Bringing the Market inside the Firm?," American Economic Review, American Economic Association, vol. 91(2), pages 212-218, May.
  35. Tarun Khanna & Yishay Yafeh, 2007. "Business Groups in Emerging Markets: Paragons or Parasites?," Journal of Economic Literature, American Economic Association, vol. 45(2), pages 331-372, June.
  36. Fan, Joseph P H & Lang, Larry H P, 2000. "The Measurement of Relatedness: An Application to Corporate Diversification," The Journal of Business, University of Chicago Press, vol. 73(4), pages 629-60, October.
  37. Raja Kali, 2003. "Business groups, the financial market and modernization," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 11(4), pages 671-696, December.
  38. Kali, Raja, 1999. "Endogenous Business Networks," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(3), pages 615-36, October.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Schwarz, Christian & Suedekum, Jens, 2013. "Global sourcing of complex production processes," DICE Discussion Papers 125, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  2. Schwarz, Christian & Suedekum, Jens, 2014. "Global sourcing of complex production processes," Journal of International Economics, Elsevier, vol. 93(1), pages 123-139.
  3. Amighini, Alessia & Cozza, Claudio & Rabellotti, Roberta & Sanfilippo, Marco, 2014. "An analysis of Chinese outward FDIs in Europe with firm-level data," CIRCLE Electronic Working Papers 2014/2, Lund University, CIRCLE - Center for Innovation, Research and Competences in the Learning Economy.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:fem:femwpa:2013.33. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (barbara racah).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.