The performance of group-affiliated firms during institutional transition: A longitudinal study of Indian firms

Manuscript Type: Empirical Research Question/Issue: Institutional and transaction cost theories highlight the idea that group-affiliated firms outperform unaffiliated firms in emerging economies. However, the persistence of superior performance among group-affiliated firms could be challenged by the recent, quick development of markets and institutions in these countries. This article explores the link between firm performance and the evolution of the institutional environment. Research Findings/Insights: We analyze how business group affiliation affected firm performance in India in the post-reform era, i.e. from 1990 to 2006. Our findings show that: (i) the performance benefits of group affiliation are evident in the early phase of institutional transition but level out in the late phase; (ii) older group-affiliated firms are better able to cope with institutional transition than younger group-affiliated firms; and (iii) group-affiliated service firms are better able to cope with institutional transition than group-affiliated manufacturing firms. Theoretical/Academic Implications: Our findings support both the institutional and transaction cost theories of business groups, and extend them by adding a two-phase longitudinal component. The findings also highlight the fact that the benefits of group membership vary for different firms in the group, which is in line with other recent studies. Practitioner/Policy Implications: The article has implications for managers and policy makers. Managers of business groups should adapt the timing of strategies to the evolution of the institutional environment. Policy makers should focus on the consequences of their policies, as they may undermine the efficiency of large national companies.