Business Groups in Emerging Markets - Financial Control and Sequential Investment

Hainz, Christa (June 2006): Business Groups in Emerging Markets - Financial Control and Sequential Investment. SFB/TR 15 Discussion Paper No. 124

Abstract

Business groups in emerging markets perform better than unaffiliated firms. One explanation is that business groups substitute some functions of missing institutions, for example, enforcing contracts. We investigate this by setting up a model where firms within the business group are connected to each other by a vertical production structure and an internal capital market. Thus, the business group’s organizational mode and the financial structure allow a self-enforcing contract to be designed. Our model of a business group shows that only sequential investments can solve the ex post moral hazard problem. We also find that firms may prefer not to integrate.

• Item Type: Paper (Discussion Paper)
• Keywords: Business groups, self-enforcing contract, institutions, internal capital market
• Collections: Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems; Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > B5 - Weltwirtschaftliche Integration und die neue Firmenorganisation
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: G31, G32, G34, K49, L22
• Language: English