THE STAGES OF INTERNATIONAL GROWTH OF THE BUSINESS GROUPS FROM EMERGING ECONOMIES

. The previous studies have focused on weak institutional environment in explaining the growth of business groups in emerging economies. The recent events, however, show that business groups continue to grow even when the institutions are getting better. This is evident both in the domestic and international growth stages. This paper addresses this by providing a group and a firm-level analytical framework as an alternative in examining the international growth of business groups. The focus is putting the institutional environment in the background and the business groups in the forefront. The paper builds on the endogenous growth of business groups and proposes that their persistence, regardless of institutions and level of economy, can be explained not only through their environment but also by the internal dynamics of their organizational structure and group-specific advantages. This proposition is based on the theory of the firm through the combined application of transaction cost economics, resource-based and dynamic capabilities views.


Introduction
e analyses of business groups in di erent developing economies are well-documented in the literature (Colpan, Hikino, & Lincoln, 2010). A business group (also abbreviated as BG or BGs) is de ned as a hierarchy of independent rms, conceived to collaborate in domestic and international markets under a common administrative control; the a liate rms are linked by various social and economic exchanges of resources, interpersonal trust, and mutual adjustment (Granove er, 1995;Le , 1978). In general, the transaction cost economics (TCE) theory, which argues that business groups will emerge due to the imperfections and incompleteness of the market, applies to the majority of the cases (Chang, 2006). Accordingly, the business groups are able to avoid the market imperfections by internalizing some transactions within the business group network rather than the external market (Le , 1978). erefore, the creation of an internal market provides the business groups with legitimate powers to exercise control over their operations without heavily relying upon the ine cient open market.
In recent decades, the above application of TCE for understanding the organizational choice of business groups has been enriched by scholars. is is through incorporating the concept of 'institutional voids' in the analyses. Institutional voids refer to the constraints that hamper the smooth functioning of the market. ese are the absence of reliable institutions, standards and intermediaries, either so or hard, which impede the e ciency of the transactions between buyers and sellers (Khanna & Palepu, 1997;Langlois, 2013;North, 1990). is new line of reasoning maintains that because of the existence of institutional voids, some institutional and contextual mechanisms will exist to support the growth of business groups (Carney, 2008). Indeed, some scholars suggest that since the strong competitive position of business groups in developing economies is a ributed to institutional voids, the lessening of the voids or strengthening of the institutions can mean deterioration in the growth and expansion of business groups (Gaur & Kumar, 2009;Kock & Guillén, 2001;Strachan, 1976). However, recent research results and the existing growth pa ern of business groups show a di erent picture. Siegel and Choudhury (2012) found that in the two decades a er Indian liberalization (1989)(1990)(1991)(1992)(1993)(1994)(1995)(1996)(1997)(1998)(1999)(2000)(2001)(2002)(2003)(2004)(2005)(2006)(2007)(2008), when institutions were ge ing be er in India, business group rms on average performed be er than non-business group rms due to their recombination of existing economic inputs. e same conclusion was drawn by  for some business groups in the East and Southeast Asian regions. Also, the recurring trend in the list of top performing rms from the developing economies as ranked by the United Nations Conference on Trade and Development (UNCTAD) shows that rms a liated to a business group continue to be on top of the list despite the many transformations of the institutions of the developing economies (UNCTAD, 2013). Hence, the overarching explanation of the growth and persistence of business groups should by no means restrict the focus on institutional voids but must also include the 'group-speci c characteristics' . ese group-speci c characteristics are likely related to the 'capabilities of recombination' rather than the developing economy environment. erefore, this paper contends that exogenous explanations, such as the institutional environment, are just types of environmental or institutional conditions which only serve as inputs to the growth of business groups and not the source of persistence themselves.
In view of that, this paper argues that the growth of business groups in the emerging economies does not lie within the institutional conditions but on their innovative response to such conditions, that is, internalization of market imperfections and endogenous capability building among the a liates (Mahmood, Zhu, & Zajac, 2011). is is consistent with the Penrosian theory of the growth of the rm and the dynamic capabilities view (Penrose, 1959;Teece, Pisano, & Shuen, 1997;Verbeke, 2009). Following this, the paper builds and theorizes on the business group-speci c explanations rather than the explanation of institutional voids. Further, the paper proposes that the explanation of the persistence of business groups, regardless of the type, location and level of economy, lies in the group dynamics and the functioning of its resources and capabilities. ese group resources and capabilities form an internal market, where the competitiveness is being developed and exploited, and thus serve as the key explanation of their existence and evolution over time.
2. e emergence of business groups e emergence of business groups in the twentieth century is not a new phenomenon. Jones (2000), corroborating on the work of Chapman (1985), recon rmed that the British trading merchants in the nineteenth century evolved into (and use the structure of) diversi ed business groups in order to expand, both in geographic and product operations. ese early business groups were understood as entities that intermediate between the 'inter-country' market imperfections and their a liates ( Jones & Khanna, 2006;Jones & Wale, 1998). is pa ern was also evident in the transformation of Japanese trading merchants, as part and parcel of the government's policy towards the modernization program during the mid-nineteenth century (Kojima & Ozawa, 1984).
In the developing economy literature the emergence of business groups is associated with the issue on the severity of horizontal and vertical incompleteness of the market (Khanna & Yafeh, 2007). In fact, some actually do not have any credible markets to start with. us, the market transactions are deemed costly and the market system needs time to develop. In his notable work Leibenstein (1968) identi ed two broad types of entrepreneurial activities which he termed routine and "N-entrepreneurship" or "new type entrepreneurship". e former means that the activities involved in carrying and coordinating the parts of the production are well known and operate in well-established or clearly de ned markets (at least to some extent in the developed economies). e la er is the opposite, where not all markets exist and the entrepreneurs (or the economic actors of an economy) must ll in for the market de ciencies (ibid., p.67). To address this, entrepreneurial activities will make some portions of the market less impeded through extending markets but may make others more so through the creation of monopolies, or the creation of other barriers to entry where they previously did not exist (ibid., p.77). e condition where N-entrepreneurship exists u erly mirrors the entrepreneurial activities of rms in the developing economies. e rms emerge to ll a substantially high volume of gaps in the market network. is is basically how the development of rms in the developing economy is di erent from those in the developed ones. Practically, the developing economy rms choose to innovate their organizational structure, such as networks-like business groups, to respond to the multiple levels of market imperfections in the external market. e seminal work of Nathaniel Le on the industrial organization and development in the developing countries was the rst to analyze this phenomenon. Le (1978) reasons that the business group pa ern of industrial organization is readily understood as a microeconomic response to wellknown conditions of market failure in less developed countries. e institution of the group is an intra rm mechanism for dealing with de ciencies in the markets for primary factors, risks, and intermediate products. It is an institutional innovation for internalizing the returns which accrue from the interactivity operations in the imperfect market conditions of the less developed economies (Le , 1978, p.666-668).
ere are other perspectives in explaining the antecedents of the business groups and their persistence. ese perspectives look at a number of conditions which create supply and demand mechanisms for business groups to emerge. It can result from government related policies (Koike, 1993;Krueger, 1974), cultural embeddedness (Granove er, 1995) and asymmetric foreign trade and investments (Guillén, 2000). Overall, the emergence of the business group structure is almost synonymous to the e ects of the conditions in the developing market economies, coupled with the response of the market actors under such an economy.

e in uence of internal organizational structure on the growth of business groups
e organizational structure of business groups di ers from the typical single rm with regard to treatment and governance of internal organization or coordination costs. In a single rm, coordination costs arise from the interdependencies of internal markets within the single rm; whereas in the business group, these coordination costs are ideally spread among multiple rms (a liates) within the business group structural setup. is alteration develops due to the limitation of the coordination capabilities of each a liate to function e ciently in the developing economy environment. us, the boundary of the internal organization of economic production is shi ed from the single-rm level to the multiple-rm level, hence the (physical) growth of the group.
is phenomenon is again a ributed to the market imperfections in weak economies. is arrangement can be explained by transaction cost economics (Williamson, 1981). However, the bene ts of organizing complex interdependent activities within the group structure, rather than in a single rm, exceed the costs and risks associated with the various market imperfections and institutional voids in the weak economies.
ere are three dimensions that constitute the organizational approach to business groups. First, business groups organize interdependencies mainly with rms and not with markets. at is, a rm can be considered as the rst-order hierarchy, i.e. U-form and M-form (Chandler, 1990;Williamson, 1981), while the business group is treated as the second-order hierarchy, i.e. hierarchy of hierarchies. With this setup, an intermediate if not full or centralized control is also necessary. e assumption is that when rms face limitations and overwhelming market imperfections, business group level arrangement is chosen. is is because the business group approach recognizes that market imperfections reside at multiple levels of economic coordination, and some are simply beyond the natural immunity of a single rm. is is aggravated if and when the compounding group versus group competitive tendencies dominate the market. Hence, in certain markets rms belonging to a business group are be er o than single rms (Khanna & Rivkin, 2001). Second, the governance mechanism of a business group takes account of core (hierarchy-type collaboration) and non-core integration (market-type collaboration). ese core and non-core integration mechanisms are strategic, with the goal to develop, appropriate and control tangible and intangible group-speci c advantages. Core integration is the basic organizational structure of a business group by which elite independent rms are pooled and coordinated. Here we see related and unrelated portfolios being specialized and entrusted to the core elite a liate rms (Demsetz, 1988). Hence not all a liates share the same operations. On the other hand, non-core integration is the structural extension of core rms that comprises the non-core a liate rms and markets. is is where the core elite rms and the rest of the group engage in joint ventures, strategic alliances, licensing and other extended social and economic exchanges. ese transactions can be domestic, regional and even global depending on the characteristic of the a liate rm, i.e. domestic or multinational. e control in this setup can be intermediate and decentralized, but not totally independent. Here core and non-core a liate rms are given fair discretion with regard to external mode governance. is is how the boundaries of the a liate rms are set at the margin where the bene ts of further internalization o set the cost (social and economic).
e consideration as to how the two dimensions above are made possible in a business group leads us to the third point, which is control. e control in business groups focuses on two binding aspects: (1) ownership (e.g., cross-holding) and (2) intermediation in the internal transactions (e.g., director interlocks). Ownership in BGs belongs to one of the three types of arrangement: family-owned, widely-held, or stateowned (Cuervo-Cazurra, 2006). Family-owned refers to a family or its members directly controlling the business; sometimes without hiring an outsider manager to run the enterprise. is is the most common type of BGs, especially those from ever-developing markets, i.e. South Korean Chaebols, Southeast Asian BGs and Indian BGs. In cases where a hired manager is necessary, family members or their kin still make most of the decisions. For widely-held BGs, ownership is widely dispersed among multiple shareholders and mostly publicly listed. Lastly, state-owned BGs are a unique type of organization as they are clearly reliant on the intervention of the state. ese BGs are mostly from previously centrally planned economies like China and Russia (Abegaz, 2005). ey function as the market arm of the state and occupy a larger chunk of the state's business operations.
On the other hand, the intermediation in internal transaction of BGs follows a loosecoupled system, where there is both distinctiveness and responsiveness (Orton & Weick, 1990). It is a combination of e ciency responses and mere preference. Group a liates are interdependent in facilitating coordination, control and external intermediation. Yiu et al. (2007) suggest that within-group adaptive a ributes of BG interdependencies take into account two dimensions: horizontal and vertical linkages. Horizontal connections consist of an internal transactions mechanism, which refers to internalization and allocation of critical resources and information among BG a liates. On the one hand, the vertical mechanism of a BG functions and echoes the command chain of the group from the dominant owners to the a liates. Dominant owners are the Core owner elite, an individual or an entity (i.e. an a liate rm), or a collection of individuals/organizations having the dominant share and control over the BG parent company and/or core companies of the business group. Companies in the vertical hierarchy would have the apex rm/ headquarters, a holding company, strategic business units and operational a liates.

e group-speci c advantages as catalysts of business group's growth
In emerging economies the advantages of the rms a liated to a business group arise from the interaction of and response to speci c country characteristics, imperfections in capital, labor and product markets, and the recombination capabilities of the a liate rms (Chang & Choi, 1988;Chang & Hong, 2000;Le , 1978). ese advantages are supported by the accumulated knowledge that has been captured, owned and controlled by the business group over time (Dierickx & Cool, 1989;Mahmood et al., 2011). is paper calls these advantages the Business Group Advantages (here also abbreviated as BGAs) as they accrue exclusively to business group-a liated rms. e BGAs are internalized and found within the business group structure and stored at the group level. Since a business group is composed of independent a liate rms, BGAs, in theory, can be found within each a liate rm. erefore, BGAs have two levels, one is the group as a whole and the other is at the individual a liate level. Both facilitate the dynamic growth and persistence of the business group.

The impact of group-level advantages
ere are three generic components to describe the competitive structure of business group advantages. e rst is reduced transactions costs through the group internal capital, labor, internal buying and selling, and market information search. is explains the incentive of reducing the risks and costs from searching or developing information and advantages in the external market (Le , 1978;Williamson, 1981). e business group structure provides an array of internal resources, which an a liate can exploit. e most common example is the internal group capital that is a very good source of capitalization for a liates in times of investments, including foreign investments, and expansion (Gonenc, Kan, & Karadagli, 2007). e second component includes transferable group managerial skills and experience in product and geographical diversi cation, contacts and intermediation capabilities, and state relations. ese advantages provide a combination of context speci c and transferable skills among BG a liates (Tan & Meyer, 2010). Amsden and Hikino (1994) argue that the repeated industry-entry pa ern of business groups was realized because of their "contact capabilities" with the state and foreign multinationals, followed by "project execution capabilities". According to them, these project execution capabilities refer "to the skills required to establish or expand operating and other corporate facilities, including undertaking preinvestment feasibility studies, project management, project engineering, procurement, construction and startup operations". ese capabilities are generic to business groups and not industry-speci c. In addition, business group experience in management of product and geographic diversi cation directly aid other a liates in other potential product areas and locational expansions (Kim, Hoskisson, Tihanyi, & Hong, 2004). e last component is the economies of scale and scope such as allocation and codevelopment of resources in the area such as in R&D and technology, marketing and distribution, group brand and reputation (Chandler, 1990). A successful processing system that is developed by one a liate may, at one point or another, be useful to another a liate for benchmarking. Lead times and costs are reduced through this approach. Another important and unique BGA is group reputation. Group a liates enjoy the ease of winning contracts or projects only because of their membership in a reputable business group. A business group might have a very long successful history of operations and transactional negotiations that create a positive halo e ect on all the a liates in the group.

The dynamics of affiliate-level resources and capabilities
e business group-level advantage explains what kinds of advantages are found at the group level, but it does not explain all the potential advantages that are found at the individual a liate level. ese a liate level advantages contribute to the growth of the business group by strengthening the overall resources and advantages of the group. is paper proposes that what individual BG a liates have are both the subset of the BGAs and A liate-level Advantages (here also abbreviated as ALAs). By building on BGAs, a liate rms can develop speci c advantages independently. ese advantages are unique resources, capabilities and strengths speci c to an a liate rm (Barney, 1991). e bundle of these BGAs and ALAs is a function of the recombination capabilities by the individual a liates (Teece et al., 1997;Verbeke, 2009). It de nes the overall advantage of each individual a liate as well as the heterogeneity of the a liates within a business group (Rugman & Verbeke, 1992). e variance among ALAs occurs due to the level and extent of BGA recombination by each a liate, that is, some a liates operationalize or depend on BGAs more than others. is is because each a liate has speci c objectives, roles, operational scope and, eventually, competitiveness. Hence, the a liates can use the group structure to complement for the missing and potential advantages (Dyer & Singh, 1998;Lavie, 2006;Mahmood et al., 2011). 4. e growth of emerging economy business groups across borders 4.1. Initial internationalization growth stage e international growth of business groups from emerging economies has been studied for quite a while. However, the results are inconclusive. Speci cally, the issue on the advantages of business groups has been cited as the rationale for both success and failure, but the dimension in which these advantages are based is completely lacking(see, e.g., Hoskisson, Johnson, Tihanyi, & White, 2005;Lall, 1983;Pananond & Zeithaml, 1998). is paper argues that the fundamental approach to understand the nature and extent of the international growth of business groups is through their business group advantages, i.e. the extent to which they share or bene t with the strategic resources and capabilities of the business group while growing across borders.
is can be determined by looking at the extent to which a liates are dependent on BGAs. As such, the greater the reliance on BGAs, the stronger the relationship of an a liate with the business group; or the more an a liate rm explores and exploits group resources (the knowledge captured and owned by the group), the more they can bene t from the group structure. e practical way to validate this approach is to illustrate the international development stages of the business groups through time.
e business group a liates rely on their business group when deciding to enter a new market and even more so in entering an international market. e necessity of having knowledge about new markets is tantamount in their strategic intent or entering into a new venture. As practiced, this knowledge can be acquired at the group level for strategic reasons. e most direct is that some of the BG a liates of the business groups have already done it before and some are even operating in that same market. eir experiences and familiarity are expected to be channeled back to the group for benchmarking. Another obvious reason why BG a liates rely upon their business groups is access to capital which is controlled at the group level or their group holding companies. e BG a liates prefer to secure their capital requirement within the group rather than taking a higher risk of negotiating with an external nancial provider. Hence, in the internationalization and initial stage of operations of BG a liates, reliance on BGAs is very important considering the liability of foreignness (Zaheer, 1995) of the new market or venture. In short, business group a liates may not possess strong a liate level advantages at the initial stage of international operations.
Proposition 1: e initial international expansion growth of business group a liates om emerging economies is signi cantly in uenced by their reliance on business group advantages. e weaker their ALAs, the higher their reliance on BGAs.

International development stage
As the business group a liates continue to share signi cant support from their business group, they also advance their own a liate-level advantages in the development stage. However, the quality of ALAs ma ers a lot here, beyond BGAs, due to the presence of location and non-location bound assets. ese assets are the advantages that can be acquired by the a liates in the host countries (Rugman & Verbeke, 1992). As a response, BG a liates start to learn and acquire other capabilities which are very important in their operations. e business group a liates recognize that they must evolve according to what they foresee as an important arrangement between their internal characteristics and the external system enabling them to achieve independent growth (Penrose, 1959). is is strategic in order to keep its pace with other rms or multinationals. Clearly, the only way for the BG a liates to survive in the competition with incumbent multinationals is to develop superior or comparative speci c advantages through the combination of external and internal resources and capabilities.
Proposition 2: In the development stage as business group a liate multinationals, the higher the pressure for internalizing and exploiting non-locationbound assets in the host countries, the higher their reliance on BGAs

Mature stage
A rm's organizational structure is the result of its interaction with its direct environment (Nelson & Winter, 1982;Sco , 2001). e rms have their own ways of blending with their institutional environment for the sake of legitimacy (DiMaggio & Powell, 1983). In the case of the business group a liates, operating in other countries means more di culties compared to the traditional organizations in terms of legitimacy and organizational management. e reason is that business groups are embedded in a multilevel inter-organizational structure in their home and host countries more than the typical single rms (Kostova, Roth, & Dacin, 2008). is multilevel structure contains vertical and horizontal ties bonded by formal and informal relationships between individuals and rms. is is also heightened when transactions within the group are becoming far too many to handle. Indeed, the implication of this multilevel business group structure is inherently complicated (Granove er, 2005). However, if there is a sound and dynamic governance framework in place, the probability that business group advantages remain to complement the BG a liates exists even in the mature stage of its operations ( Jones, Hesterly, & Borga i, 1997). Nonetheless, the ultimate trajectory lies on the signi cance of the long-term goal of a BG a liate as a multinational and the whole business group in general. In the end, the in uence of home-host environmental factors determines the BG a liate's level advantages and de nes their competitive position in the global environment (Bartle & Ghoshal, 1987).

eoretical implications, research limitations and future direction
e analyses of business groups have been predominantly domestic in orientation. us far, business groups are well understood as domestic groups of interdependent rms, collaborating as well as competing with multinationals in their home country. ey are not seen as international rms or global players despite their international activities in inter-regional markets and even in advanced economies. As a ma er of fact, business groups have already evolved along with their home country institutions and developed some internationally transferable resources and capabilities (Ramamurti, 2012). What is lacking, however, is the explanation on how these accumulated advantages become signi cant if the business groups intend to grow globally or compete with other multinational enterprises in di erent regional markets. erefore, this paper contributes towards understanding this gap. It argues that the business group organizational structure and advantages are the fundamental point of departure in explaining the business groups' international expansion and competitiveness. It departs from the existing literature by building on the internal dynamics of business group advantages rather than on the external institutions in the emerging economies. In addition, the explanation of how and why business groups exist in international markets is categorically understudied compared to their domestic trajectories (Delios & Ma, 2010). e paper shows that this can be analyzed in di erent international growth stages. is is a considerable gap in the literature that, if addressed, brings new insights not only in understanding business group internationalization but also in the debate about how business-a liated multinationals can di er from conventional multinationals from other economies, especially the advanced ones. It can also open some new arguments on how international entry modes like exports, joint ventures and wholly owned subsidiaries are carried when business groups are the major actors.
Although this paper is robust in theoretical grounding, it has clear limitations on the empirical testing. One of the reasons for this is the limited number of business groups which could provide a generalized result in testing the concepts of this paper. Nevertheless, this study provides a lens on how to foresee the growth of business groups both in their domestic and international dimensions. On the other hand, there is enormous potential to expand this study. Firstly, using the concept of BGAs and ALAs, the business organizations in emerging markets can now be clearly classi ed into business groups and non-business groups. By this, the growth pa ern of the two types of organizations can be di erentiated. As a result, the analysis of organizations in emerging markets can also be done at the group level. e analysis can even be conceptualized at the global level where the internal business group dynamics will be measured not only from business group and a liate levels but also including all the foreign subsidiaries across countries. Secondly, the existing literature of business groups has focused on Asia and Latin America. But, by broadening the scope of emerging economies, which include Africa and the transitioning eastern European economies, a consistent theoretical analysis can be applied. For example, the rms in these economies can be analyzed with regard to how they respond to market imperfections as their economic and political institutions are still developing. e rms are the key drivers of the development of markets which then boosts economic development and catch-up.
In sum, the organizations in the emerging economies, such as the business groups, are evolving faster than ever. is evolution blurs the boundaries of the rms, requiring more in-depth analysis to understand their nature. is research contributes to the conversation by focusing on endogenous growth, which provides a more realistic perspective, as an alternative to the traditional institutional analysis.When incorporating the concepts and propositions of this research into the wider dialogue on emerging market rms, it will result in a more comprehensive picture of the ecology of organizations in the emerging economies.