10-1-3.CHP:Corel VENTURA

Business groups are a common type of enterprise in late-developing countries, yet their existence appears to be at odds with extant theory in strategic management. Drawing on Schumpeter, we suggest that entrepreneurs in late development build a business group by engaging in a distinct type of innovation. Instead of creating new products they leverage local and foreign contacts to combine foreign technology and local markets. The capability to leverage contacts is broadly applicable to diverse industries, creating incentives for unrelated diversification. We make two main arguments. First, the main (initial) cause for the creation of business groups can be traced to the selection environment at the beginning of economic development in late-industrializing countries, when the ability to use contacts outweighs other capabilities in importance. Expanding businesses based on this core capability (which is different from the one underlying business success in developed countries) leads to unrelated diversification in terms of products and technological and organizational capabilities, as well as a loose organizational structure. Secondly, we suggest that the selection environment in late-industrializing countries changes systematically over time, altering the reasons underlying the continued existence and creation of business groups. We formulate several testable propositions on the evolution of business groups predicting patterns of diversification and organizational structure over time. We illustrate our theory with two case studies of business groups in late-developing countries.