Economic Institutions and the Boundaries of the Firm: The Case of Business Groups

Business groups in all of their manifestations are informational mechanisms for coordinating complementary activities -- for "gap filling." This is well known in the literature on business groups outside the Anglo-American sphere. Especially in developing economies, where markets are thin and institutions (including both political institutions and what I call market-supporting institutions) are weak or non-existent, coordination is often more cheaply undertaken within the boundaries of business groups organized as financial pyramids, typically under family control. These organizations are intimately linked to the coalition of territorial rulers that North and his coauthors (2009) call a natural state; and, indeed, such business groups are arguably themselves examples of a natural state, in that they represent a self-enforcing coalition with its own rules, norms, and mechanisms of enforcement. But even in developed economies, novelty and change create the sorts of gaps that call for business groups in the widest sense, including less-formal sets of "intermediate" relationships, as, for example, in industrial districts. In this sense, the economics of organization generally has perhaps more to learn from the literature on business groups than the other way around.