Owners' nonfinancial objectives and the diversification and internationalization of business groups

Abstract

Research Question/Issue

Studies on business groups, a collection of legally separate firms operating in unrelated industries under common control, tend to compare the behavior of firms affiliated with business groups and firms that are independent companies. Unfortunately, this ignores the diversity among business groups based on their controlling owner. Hence, in this conceptual article, we study how the types of controlling owners impact the diversification and internationalization of business groups.

Research Findings/Insights

Building on agency theory, we separate business groups into five types based on their ultimate controlling owners (state, labor, family, mutual, and bank) and identify their nonfinancial objectives. We argue that their nonfinancial objectives result in diverging levels of diversification and internationalization of business groups across owner types. Specifically, we propose that state-owned and bank-owned business groups have a relatively high level of diversification, labor-owned and mutual-owned business groups have a relatively moderate level, and family-owned business groups have a relatively low level. We also argue that state-owned and labor-owned business groups have a relatively low level of internationalization, family-owned business groups have a relatively moderate level, and mutual-owned and bank-owned business groups have a relatively high level. We add depth to these ideas by proposing that pro-market reforms alter owners' ability to achieve their nonfinancial objectives, leading to diverging changes in business groups' diversification and internationalization across owner types. Specifically, we propose that following pro-market reforms, state-owned and bank-owned business groups experience a large decrease in their level of diversification, labor-owned and mutual-owned business groups see a moderate decrease, and family-owned business groups have a small decrease. We also argue that pro-market reforms lead state-owned and labor-owned business groups to have a small increase in their level of internationalization, family-owned a moderate increase, and mutual-owned and bank-owned to experience a large increase.

Theoretical/Academic Implications

To the business groups literature, we highlight the importance of controlling owners and their nonfinancial objectives as the drivers of business group diversification and internationalization, complementing the usual focus on market imperfections. To agency theory, we highlight the diversity of owners' nonfinancial objectives and explain how these affect strategy, complementing the traditional focus on differences in objectives between owners and professional managers driving strategy.

Practitioner/Policy Implications

Managers can defend decisions based on the often-unstated nonfinancial objectives of the controlling owners, countering external investors' criticisms of managers misbehaving by not aiming to maximize profits.