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Business Groups as Knowledge-Based Hierarchies of Firms

Author

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  • Ottaviano, Gianmarco
  • Altomonte, Carlo
  • Rungi, Armando
  • Sonno, Tommaso

Abstract

Hierarchical differentiation is a cornerstone of the organizing process. In this paper, we do three things. First, exploiting a newly assembled dataset, we provide the first worldwide overview of the patterns of hierarchical differentiation across Business Groups (BGs), highlighting the coexistence of different hierarchical shapes. Second, we show how the different shapes can arise as optimal hierarchical structures in a knowledge-based model of BGs when subsidiaries’ operations involve ubiquitous problem solving under parents’ supervision. Three primitive characteristics of a BG determine its optimal choice of hierarchical structure: production efficiency and two dimensions of problem solving efficiency related to supervising knowledge creation and handling associated communication across subsidiaries. Third, we check the consistency of the model’s predictions with the empirical patterns for Europe, the US, and the world. The model successfully passes the consistency test.

Suggested Citation

  • Ottaviano, Gianmarco & Altomonte, Carlo & Rungi, Armando & Sonno, Tommaso, 2021. "Business Groups as Knowledge-Based Hierarchies of Firms," CEPR Discussion Papers 16677, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16677
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    More about this item

    Keywords

    Business groups; Knowledge hierarchies; Multinational enterprises; Organization of production;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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