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Understanding the behavior of business groups: A dynamic model and empirical analysis

  • Cheong, Kwang Soo
  • Choo, Kineung
  • Lee, Keun
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Business groups play significant economic roles in many countries. Motivated by the observation that the literature on business groups is ever-expanding yet providing ambiguous or conflicting results based on empirical investigations, this paper intends to first develop a theoretical model to explain behavior and performance of business groups and then conduct complementary empirical analysis. Drawing on Penrose's (1959) resource-based theory of firm growth, this paper models the firms of which some key resources are lumpy or indivisible and thus they must be purchased or installed only in certain sizes. This premise in the basic model leads to an advantage for business-group firms relative to stand-alone firms without respect to the existence of market failure. The model also predicts that business-group firms will be more profitable in terms of profit-to-sales and will have higher sales and asset, leading to faster growth, other things being equal. Implications of such advantage on firms' performance and behavior are investigated first using numerical experiments based on a dynamic optimization model and then regression analyses based on the Korean firm data. It turns out that a set of testable predictions derived from the basic theoretical model is generally consistent with the conclusions from numerical experiments and empirical tests.

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Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 76 (2010)
Issue (Month): 2 (November)
Pages: 141-152

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Handle: RePEc:eee:jeborg:v:76:y:2010:i:2:p:141-152
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  1. Leff, Nathaniel H, 1978. "Industrial Organization and Entrepreneurship in the Developing Countries: The Economic Groups," Economic Development and Cultural Change, University of Chicago Press, vol. 26(4), pages 661-75, July.
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