Two Faces: Effects of Business Groups on Innovation in Emerging Economies

This paper argues that business groups in emerging economies exert dual effects on innovation. While groups encourage innovation by providing institutional infrastructures, groups also discourage innovation by creating entry barriers for small and non-group firms and inhibiting the proliferation of new ideas. Using OLS and panel data estimation techniques, followed by nonparametric analysis and semiparametric kernel regression, we find evidence of an inverted-U relation between group market share and innovation in industrial sectors of both Korea and Taiwan, during the 1981-1995 period. Institutional differences between Korea and Taiwan in terms of market structure and industrial policies provide useful conceptual implications from the empirical comparison.