Business group internationalization: choosing a host country according to institutional distance.

AutorGama, Marina A.B.
CargoTexto en ingles - Ensayo

1 Introduction

This article analyzes to what extent the commitment of resources in the internationalization process of a family business group is associated to the host country's institutional distance. Previous studies indicated a number of advantages and disadvantages in the internationalization of family business groups. Among the disadvantages is the fact that family business groups have rooted within their affiliates institutional characteristics that are specific to their home country, thus hindering their adaptation when there is internationalization to countries with different institutional characteristics (Pedersen & Stucchi, 2015). Regarding advantages, we can highlight the fact that being affiliated to a group is a way of overcoming institutional weaknesses such as fragile regulations, breakdowns in infrastructure and a failure to fulfill contracts. Group-affiliated firms benefit from financial support and from information for the internationalization process, while also making use of family business groups' influence on the government of the country of origin (Ghemawat & Khanna, 1998; Yaprak & Karademir, 2010). Furthermore, there is evidence that family business groups internationalize more quickly than non-affiliated firms, expanding to a higher number of countries, and their entry generally involves greater resources (Yaprak & Karademir, 2010). However, there is a lack of definitive evidence concerning the decision-making process regarding resource commitment, or whether this decision is associated to the institutional level of the host country, since institutions play a relevant role in the establishment and development of family business groups. As such, this article seeks to contribute to existing theory on the internationalization of family business groups, testing if the choice for greater or lesser resource commitment in the internationalization of affiliated firms is associated to the institutional distance between the country of origin and the host country.

Considering that the development of firms depends on the business environment to which they belong (Williamson, 1981), we can understand the growth of family business groups from an institutional perspective. In order to reduce transactions costs in markets with weak institutions, groups diversify and integrate vertically. As well as performing transactions amongst themselves, these integrated firms are able to overcome fragile institutional contexts by doing so (Khanna & Palepu, 1997, 1999; Yiu, Lu, Bruton, & Hoskisson, 2007). Thus, the creation of this intragroup market provides support to affiliated firms during their expansion into different countries, regardless of their institutional distances. The term "institutional distance" designates a difference or similarity between home and host countries in terms of institutional environments (Kostova, 1999). Measuring institutional difference is important to understanding the type of entry mode strategies that can be matched to such distance, so as to ensure firms abroad have a competitive edge (Hernandez & Nieto, 2015).

For this analysis, we used Brazil as the research sample. Brazil was chosen due to its expressive representativeness in terms of family business groups; the 200 biggest groups represented 52.6% of the Gross Domestic Product in 2012. Also, being a country with weak institutions, family business groups use this "disadvantage" to grow and diversify. Moreover, Brazil holds an average ranking position according to the Worldwide Governance Indicators (WGI), which increases the possibility of its comparison with other nations on that list. As such, the annual ranking from Valor 200 Grandes Grupos was used to compose a sample of 38 groups with international operations. Using these 38 family business groups as a starting point, about 500 affiliated firms were located abroad. These subsidiaries were used in a hypothesis test through panel data and fixed effects regression.

Results show that decisions by family business groups, in terms of resource commitment to internationalize, are associated to the institutional distance of the host country. Based on the assumption that the degree of resource commitment comes prior to the choice of a host country, family business groups tend to internationalize with less resource commitment--herein considered a commercial office--to countries that are more developed than the home country. However, when they choose to internationalize with higher resource commitment--in this study referring to a manufacturing plant--family business groups choose countries that are less developed than their home countries.

2 Theoretical foundation

2.1 Family Business Groups

Family business groups are a specific organizational form (Khanna; Yafeh, 2007) and, despite being part of developed markets, as is the case of Italy and Sweden (Chang, 2006; Khanna & Yafeh, 2007), they dominate private sector activities in the majority of emerging markets around the world (Khanna & Palepu, 2000a). These groups are given different names in different countries. In South Korea, for example, they are called cheabols\ in Japan, keiretsw, in South America, grupos economicos; and, in Russia, oligarchs (Granovetter, 1994). So far, there is no clear consensus in literature about the definition of family business groups (Cuervo-Cazurra, 2006; Khanna & Rivkin, 2001). Definitions vary from country to country, but the most usual definitions are the following: (i) in a broader approach adopted by Sociology, business groups are a series of firms that are formally or informally connected to each other (Granovetter, 1994); (ii) the other approach, referring to Economics, is more specific and suggests that family business groups are a collection of formally independent firms, although their administrative and financial aspects are often jointly controlled, and often by a family (Chang & Hong, 2002). Lastly, the definition used in this article is the one suggested by Ghemawat and Khanna (1998) and Khanna and Palepu (1997), in which business groups are legally independent firms, under family control, that operate through a range of industries and, mostly in emerging markets (Ghemawat & Khanna, 1998; Khanna & Palepu, 1997).

In regards to organizational structure, family business groups vary greatly. Some are diversified, while others are more vertically integrated (Khanna & Yafeh, 2007). According to Schneider (2009), family business groups diversify so as to improve economic return through an economy of scope and also to reduce the risk of managerial volatility. For example, the average of sectors to which Chilean groups belong is around 5.6. In India, they belong to 4.2 sectors, and, in the Philippines, 3.5 sectors (Khanna & Yafeh, 2007). Additionally, a recent study showed that, in Brazil, diversification of family business groups is at around 4 sectors per group (Costa, Bandeira-de-Mello, & Marcon, 2013). Concerning vertical integration, there are groups that belong to different and correlated industries. For example, family business groups that operate in the agricultural sector have an office that trades agricultural products. Vertical integration also varies among countries. For example, Philippine groups are more vertical than Indian groups, which, in turn, are more vertical that Mexican groups (Khanna & Yafeh, 2007). In respect to ownership and control, there are vertically controlled groups--pyramidal, and the horizontally controlled (Khanna & Yafeh, 2007). Essentially, family business groups are pyramidal (La Porta, Lopez-de-silanes, & Shleifer, 1999; Morck, Shleifer, & Vishny, 1988; Morck & Yeung, 2003) and, by means of the pyramid structure, the firm directly and indirectly controls the affiliated firms. Through this, families always control the vote in all group firms, even when they do not necessarily own them (Morck & Yeung, 2003).

It is possible to understand the expansion of family business groups through Transaction Cost Theory (Williamson, 1981). This theory suggests that development of the firm depends on the institutional environment in which it is inserted. When institutional failure occurs, a transaction economically profitable to both parts is not established, since the costs of each transaction outweigh the benefits (Williamson, 1981). Transaction costs are high because rules are not followed; there are imperfect contracts and legislations, when compared to transactions costs in developed countries (Khanna & Palepu, 1997; Khanna & Rivkin, 2001). For example, in emerging markets, the financial sector is characterized by limited transparency, weak corporate governance, and control. Financial funds, business analysts and venture capital, the intermediaries, are not always involved in the processes. Moreover, regulation has not been fully developed or is not strong enough to ensure that rules are obeyed (Khanna & Palepu, 2000a).

As proposed in the definition, business groups are normally family-ruled and usually developed in markets with high transaction costs (Hoskisson, Eden, Lau, & Wright, 2000). A reduction of transaction costs is possible due to the fact that groups diversify, so they can do better business among the group-affiliated firms and overcome the fragile institutional context (Khanna & Palepu, 1997, 1999; Yiu et ah, 2007). As a result of the previously presented weak conjectures and internal transactions, family business groups create capital, production and work markets within the group. For example, many family groups have their own banks, performing transactions with affiliated firms, as Banco Original, part of Grupo JHS&F, or Banco Moneo, part of Marcopolo. Another example is uncovered in the job market, in which groups seek to exchange their professionals among the different affiliated firms, instead of hiring someone from the market. In this sense, Hyundai business group developed a technical training process and a research institute to...

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