Performance Impact Of Business Group Affiliation

To understand the performance implications of corporate strategies as conditioned by business group affiliations, we analyze the relationship between corporate diversification and performance for 889 Indian firms. We find that diversified firms perform significantly worse than focused firms and that there exists a significant negative relationship between the degree of diversification and firm performance. A comparative analysis of firms affiliated with Indian business groups and those affiliated with MNCs indicates that sources of negative impact of diversification on performance are conditioned by the nature of a firm's affiliation. For multinational affiliates, diversification appears to be associated with poor asset quality and asset management, which is an indicator of possible agency conflict. For domestic business group affiliates, diversification appears to generate cost inefficiencies leading to poor performance.