Empirical examination of diversification strategies in business groups

Purpose - To examine the influence of direction of related and unrelated diversification on business groups' performance in emerging markets. Design/methodology/approach - The paper empirically examines a hypothesis based on the theoretical perspective of the resource‐based view. The paper builds a regression model with the dependent variable Tobin'sqas a proxy for group/firm value and various other performance measures (derived from financial data) that theory suggests influences firm value. It examines the differences in firm value measure across three classes, namely related‐diversified business groups, unrelated‐diversified business groups and standalone firms. Findings - The results confirm the findings of prior research which suggests that group affiliation is beneficial in emerging markets. However, as a departure, the main finding is that the benefits of group affiliation are not equally available to related‐diversified and unrelated diversified groups. Research limitations/implications - This research needs to be tested in other emerging markets for generalizability. The results hold under certain assumptions that the paper makes (and mentions) while subjecting data to aggregation and empirical analysis. Practical implications - While diversified business groups are valued in emerging markets, this work clearly establishes that related‐diversification strategy is better and more profitable in the context of emerging market. Thus, managers of business groups are better off pursuing related‐diversified strategy over unrelated‐diversified strategy. Originality/value - Prior work has examined the benefits of group affiliation and the extent of diversification question separately. This paper examines the direction of diversification question which is built based on the resource‐based perspective for the first time. This contribution extends the understanding of business groups and performance linkages in an emerging market context.