The Evolution and Restructuring of Diversified Business Groups in Emerging Markets: The Lessons from Chaebols in Korea

Abstract

Abstract. This paper proposes an evolutionary model of business groups in emerging economies by tracing the evolution and restructuring of business groups in Korea. Underlying our model are two theoretical premises: (1) the value-creation potential of business group diversification depends on the quality of the economic institutions supporting the economy; and (2) the strategy-structure fit is a key determinant of diversified business groups' performance. Combining these two premises, we link business group evolution with institutional context, sources of competitive advantages, diversification strategy, and structure. To illustrate our theoretical arguments, we provide an overview of the evolution of chaebols in Korea and examine the restructuring of two major business groups, LG and Hyundai Motor. We conclude by discussing implications for management, public policy, and future research.

A tale of two levels: the diversification of business groups

“…Prior studies have examined business groups either at the firm level (e.g., Guillé n, 2000; Khanna & Palepu, 2000b;Kim, Hoskisson, Tihanyi, & Hong, 2004) or at the group level (e.g., Chung & Luo, 2008;Luo & Chung, 2005;Mahmood, Chung, & Mitchell, 2013;Mahmood & Lee, 2004;Mahmood & Mitchell, 2004;Yiu, Bruton, & Lu, 2005) assuming that hierarchy exists at just one level. I argue that group-level diversification should be examined as a separate and different (but related) phenomenon from that of firm-level diversification because the purpose of the former is different from that of the latter.…”

Diversification and Performance of Group-Affiliated Firms during Institutional Transitions: The Case of the Chinese Textile Industry

“…Therefore, it is very natural that researchers have begun to study differences in diversification strategy outcomes across different stages of institutional transition (Kedia et al, 2006;Kim et al, 2004b;Lee et al, 2008).…”

“…Accordingly, business groups' adaptation to institutional transition should consist of two kinds of strategies as responses to the changes in both institutional and market environments: firstly and fundamentally, renew the underlying institutional forms and mechanisms (e.g., corporate governance, cultural values) to make them comparable with other business organizational forms; second, on that base, adjust the pattern of strategies such as diversification (Kedia et al, 2006) and organizational structure (Kim et al, 2004b). Meanwhile, previous studies have paid little attention to the first kind of strategy, which can be named 'institutionally rooted organizational evolution' from an institutional and organizational perspective.…”

“…Given the significance of business groups in emerging Asian economies (Carney, 2008), in recent years, there has been an increasing concern about the relationship between group-affiliated firms' diversification strategies and their economic performance in the areas of management (Chakrabarti et al, 2007;Kim et al, 2004b;Singh et al, 2007) and corporate finance (Khanna and Palepu, 2000;Lins and Servaes, 2002).…”

“…It is argued that when the institutional foundations of the emerging economy are moving toward markets, business groups will be confronted with less accessibility to external institutional resources (Peng, 2003) and increasing institutional pressure (Kedia et al, 2006;Kim et al, 2004b). These external changes will result in necessary adaptations to be conducted at all levels of the business group, which increase the complexity of the strategy space that affiliated firms can choose when pursuing diversification strategies (Kedia et al, 2006;Lee et al, 2008).…”