Business group affiliation and foreign subsidiary performance

• Author: Vincent E. Kunst,Sjoerd Beugelsdijk,Sathyajit R. Gubbi,Sarah Castaldi
• Date: 01 November 2019
• Published date: 01 November 2019
• DOI: http://doi.org/10.1002/gsj.1357

RESEARCH ARTICLE

Business group affiliation and foreign subsidiary

performance

Sarah Castaldi

1

| Sathyajit R. Gubbi

2

| Vincent E. Kunst

3

|

Sjoerd Beugelsdijk

2

1

Copenhagen Business School, Department

of Management, Society and

Communication, Copenhagen, Denmark

2

Department of Global Economics and

Management, University of Groningen,

Groningen, Netherlands

3

Department of Strategy, IB, and

Entrepreneurship, University of Liverpool,

Liverpool, UK

Correspondence

Sarah Castaldi, Copenhagen Business

School, Department of Management,

Society and Communication, Copenhagen,

Denmark.

Email: sca.msc@cbs.dk

Abstract

Research Summary:Business group (BG) affiliation

affects the strategic behavior and performance of firms.

Until now it has been theoretically unclear and insufficiently

empirically tested whether affiliation advantages extend to

the foreign subsidiaries of group members. We attempt to

determine if they do, and if so, to identify the boundary con-

ditions that matter. We analyze a large panel of 451 foreign

subsidiaries of 136 Indian multinational firms over the

2003–2012 period and find that BG affiliation does enhance

foreign subsidiary performance when host-market institu-

tions are weak and when the parent is in manufacturing.

Managerial Summary:Our research speaks directly to

managers of multinational firms who seek to leverage the

benefits of BG affiliation across national borders. We

show that BG affiliation is only beneficial when the for-

eign subsidiary is located in a country characterized by

weak institutions and when the parent is in manufacturing.

If, on the other hand, the foreign subsidiary is in a country

with well-functioning institutions and the parent in ser-

vices, managers will not be able to count on BG advan-

tages, rather they will have to develop competitive

capabilities locally, that is, the foreign subsidiary will have

to function more like a standalone firm.

KEYWORDS

business groups, foreign subsidiary, institutional quality, subsidiary

performance

Received: 3 April 2018 Revised: 30 August 2019 Accepted: 4 September 2019

DOI: 10.1002/gsj.1357

Global Strategy Journal. 2019;9:595–617. wileyonlinelibrary.com/journal/gsj © 2019 Strategic Management Society 595

1|INTRODUCTION

Business groups (BGs) are made up of firms, often in unrelated industries, that are legally indepen-

dent from one another, and yet they form an interconnected network (Granovetter, 1995; Khanna &

Palepu, 1997; Yiu, Lu, Bruton, & Hoskisson, 2007). Member firms—BG affiliates—derive multiple

benefits that help them cope with local conditions and derive first-mover advantages when opportuni-

ties arise (Guillén, 2000; Khanna & Yafeh, 2007; Manikandan & Ramachandran, 2015). Our under-

standing of BGs is based largely on the activities and conduct of member firms in their respective

home countries (Chang & Hong, 2000; Guillén, 2002; Hoskisson, Cannella, Tihanyi, & Faraci,

2004; Luo & Chung, 2005; Manikandan & Ramachandran, 2015). With BG affiliated firms increas-

ingly expanding into foreign markets (Holmes, Hoskisson, Kim, Wan, & Holcomb, 2018), the ques-

tion of whether group affiliation benefits extend to foreign subsidiaries has arisen. While some have

argued that BG affiliation facilitates foreign market expansion (e.g., Chari, 2013; Chen & Jaw, 2014;

Elango & Pattnaik, 2007; Garg & Delios, 2007), there are studies that indicate it does not

(e.g., Chittoor, Sarkar, Ray, & Aulakh, 2009; Gaur & Delios, 2015; Pattnaik, Lu, & Gaur, 2018). We

need a better understanding of the benefits that foreign subsidiaries of BGs can derive from BG

affiliation.

The possibility of cross-border BG benefits takes on additional importance in light of the proac-

tive pursuit of internationalization by firms based in emerging economies where such groups are

prevalent (BCG, 2014; Guillén & García-Canal, 2009; Luo & Tung, 2007). Many of those that have

become global giants are part of large groups, take LG in Korea, Tata in India, and Haier in China,

all of which have been widely researched and observed in practice. PriceWaterhouseCoopers (PWC,

2010) projects a rise of more than 40% in the number of BG affiliated firms by 2024 which will make

them an even more significant segment of total global business. We do not know how well BG mem-

ber firms are performing “[…] in increasingly dynamic and innovative international markets”

(Holmes et al., 2018: 134), although a meta-analysis of the vast BG literature shows that “[…] the

performance implications of affiliation are very heterogeneous and must be qualified by the moderat-

ing effects of institutional contingencies”(Carney, Gedajlovic, Heugens, Van Essen, & Van

Oosterhout, 2011, p. 451). Thus, to assess whether BG affiliation has an impact on firm international-

ization, institutional context needs to be taken into account. Does BG affiliation efficacy depend on

institutional conditions in the country in which a foreign subsidiary is located, and if so, to what

extent? As far as we have been able to determine, there has been no systematic analysis of this possi-

bility. We make an important contribution to the BG literature by comparing the financial perfor-

mance of the foreign subsidiaries of BG affiliated firms to that of their unaffiliated competitors. Our

research question is whether BG affiliation is beneficial to foreign subsidiary financial performance,

and if so, under what conditions.

We posit that the unique network form of BGs directly benefits the foreign subsidiaries of member

firms as it facilitates the redeployment of group resources, notably access to financial and human capi-

tal. We predict therefore that the foreign subsidiaries of BG affiliated firms will perform better than the

foreign subsidiaries of unaffiliated firms. Specifically, we expect BG affiliation to indirectly benefit for-

eign subsidiaries by strengthening the firm-specific advantages (FSAs) of the parent firm and that this

will be reflected in the financial performance of subsidiaries in institutionally weak markets where the

need for fungible BG resources is high and the external market supply of such resources low. Finally,

given the inherent attributes of services, such as intangibility, customization, inseparability and simulta-

neity in terms of production and consumption (Boddewyn, Habrich, & Perry, 1986; Campbell &

Verbeke, 1994), and the associated limits on the ability to transfer such advantages (Lamin, 2013), we

596 CASTALDI ET AL.