Institutional Environments and Diversification Strategy of Emerging Market Firms

This Paper develops an institutionalist analytical framework to explain diversification strategies of East Asian firms, using the concepts of market uncertainty and industry maturity. The highly diversified structure of East Asian firms is primarily due to demand shift caused by rapid income growth, the appropriation and adaptation of mature technology imported from developed markets, and government intervention to lower the level of market uncertainty. Diversified business groups in emerging markets are seen as a response to the lack of market institutions. Their dynamic competitive advantage is derived from transaction costs savings from the formation of a quasi-internal capital market, efficient internal deployment of resources and reputation linkage effect. However, intensifying global competition and the need for technological innovation will force them to adopt a more focused strategy, partly as a consequence of the financial crisis and corporate restructuring.