Western business strategies are often held as models for emerging countries. Despite General Electric being the largest worldwide conglomerate, such success stories have become rather rare nowadays in the United States and Europe, although this is not true in Japan for cultural and historical reasons. For this reason, the dismantling of most conglomerates from the developed countries is for many a path to follow in the emerging markets. This belief was reinforced by the financial crisis in Asia and Latin American as multi-lateral financial institutions and consultants pressed for a closer convergence between first and third-world business models, to improve efficiency and productivity. The inefficiency resulting from the family-controlled enterprise model is another arguments used by proponents of this convergence.
Due to the word limit, this paper only aims at presenting the differences between developing and developed countries which could explain why conglomerates have disappeared from the former and are still persistent in the latter. Firstly, the very notion of Conglomerate and its characteristics will be analysed with the support of the literature review. In a second part, the paper will analyse the shift away from the conglomerate form in the industrialised countries, studying the case of the ITT Corporation, a conglomerate that is now only a shell of its past glory. Finally, the paper will evaluate the reasons that maintain into existence in the developing countries, based on an analysis of the Tata group.
[...] A conglomerate has certain advantages and might be appropriate in some cases when it is necessary to fill in the institutional voids from the operating environment. Khanna and Palepu (1999) estimate that the institutional voids originate from five factors, namely product markets, capital markets, labour markets regulation, and contract enforcements. In an imperfect product market, buyers and sellers can suffer from inefficient markets due to underdeveloped communication infrastructure. Even if information is conveyed rapidly through modern telecommunication means, the power of the watchdogs might be too weak to control the veracity of the information conveyed and hence protect the consumers. [...]
[...] Four decades of management thinking', Academy of Management Executive, Vol Issue 3. Hubbard, R.G., Palia, D. (1999) Reexemination of the Conglomerate Merger Wave in the 1960s: an Internal Capital Markets View', The Journal of Finance, vol LIV, issue 3. Khanna, T., Palepu, K. (2000) Group Affiliation profitable in Emerging Markets? An Aanlysis of Diversified Indian Business Groups', The Journal of Finance, Vol LV., No2. Khanna, T., Palepu, K. (1999) Right Way to restructure Conglomerates in Emerging Markets', Harvard, Business Review Khanna, T., Palepu, K. (1997) Focused Strategies might be [...]
[...] Hence, the Indian system, like its counterparts in other emerging markets, is far from being exemplary due to the lack of credible independent market institutions. Conclusion To conclude, I assume that most conglomerates clearly underperform focus firms in terms of efficiency and profitability, whatever the type of economy is. This underperformance is flagrant if the markets offer optimal transparent operating conditions, such as in the western countries, and if conglomerates are attached to suboptimal family management. Nonetheless, conglomerates still have reasons to exist in some regions of the world due to voids resulting in a lack of institutional integrity. [...]
[...] In Wall Street parlance, ITT had become “more dead than alive” and was forced to divest from most of its activities, including the core telecommunication business. Besides, in most developed countries, the industrial context is characterised by well-functioning capital labour and product markets. Investment bankers and accounting firms in the US and Europe play an active role in the market's allocation of capital whereas business schools give future managers core credentials with greater expertise and efficiency than corporations would. Hence, there is little place for institutional voids thanks to which conglomerate have a raison d'être by creating synergies and corporate advantages. [...]
[...] Persistence in most emerging markets While managers in the West have dismantled many conglomerates assembled in the 1960s and 1970s, the large, diversified business group remains the dominant form of enterprise throughout most emerging markets. Some groups operate as holding companies with full ownership in many enterprises, others are collections of publicly traded companies, but all have some degree of central control, often under a single family. The Philippines' Ayala Group, the Koç Group in Turkey, or the Tata group in India are only a few examples representing the numerous diversified organisations operating from developing countries (Morck, Yeung). [...]
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