Why is diversification not dead? Evidence from family business groups during economic reforms in India

Abstract

Extant literature suggests that family firms, due to their desire to retain family control, have a lower propensity to diversify than non-family firms. Contrarily, family business groups (FBGs), especially Asian FBGs, are widely diversified. It was anticipated that FBGs would become more focused during reforms in developing economies. However, these FBGs did not only maintain their diversified portfolio of businesses but also enter newly deregulated sectors during reforms. This paper draws insights from transaction cost theory and knowledge governance literature to investigate this paradox. This paper argues that the family-based governance mechanisms of FBGs can efficiently manage their diversified portfolio by avoiding the “negatives” associated with market-based exchanges and creating “positives” by efficient knowledge sharing among affiliates. Thus, diversification strategies allowed Indian FBGs to create value and preserve the socioemotional and psychic wealth that comes from owning various businesses.