What are business groups and how do they develop? Discuss the advantages and disadvantages of business groups.

Question

What will be an ideal response?

Answer 1

Business groups are legally independent firms connected by formal and informal ties which often operate in multiple industries. These groups typically consist of legally independent firms, operating in multiple (often unrelated) industries, which are bound together by persistent formal (e.g. equity) and informal (e.g. family) ties; varying degrees of participation by outside investors characterize many business groups around the world.

EMs are associated with market imperfections and inefficient supporting institutions. Business groups can be analysed as organizations formed in response to costs arising from imperfections in product, capital and labour markets. Group members can access the technological, human capital and financial capital of the groups and meanwhile learn from the group’s network. The group name enables the companies under the group to attract talent, raise capital efficiently in the domestic market, and build customer confidence quickly. Business groups emerge as key players in their respective industries due to advantages such as relations with the government, extensive networks, strong brand names and superior access to knowledge. They often have a loyal customer base and a group name associated with high quality and trust. Moreover, they have built extensive distribution networks. In entering multiple industries and continually engaging in unrelated diversification, business groups may have formed a competitive advantage which enables them to undertake such operations efficiently.

Under changing circumstances, the importance and the success of business groups may decline due to increased competition in deregulated economies and increased specialization necessary to generate competitive efficiencies. High levels of diversification in business groups may lead to cost inefficiencies. Lack of specialization may impede business groups from competing effectively in the international arena. Rigidities among the group may also hinder innovation. As the weaknesses in such markets diminish and institutions are developed, the significance of business groups is bound to decline.