Tarun Khanna and Krishna Palepu
Numerous countries have undergone rapid transitions in their economic environments. Yet, little is known about firms’ responses to such transitions. We use field-collected data to study the evolution of eighteen large and diversified business groups in Chile (1987–1997) and India (1990–1997). The chosen periods correspond to significant deregulation in the primary markets in both countries. Conventional wisdom suggests that the intermediation roles played by business groups ought to decrease during these periods. However, we find an increase in group scope, an increase in the strength of the social and economic ties that bind together group firms, an increase in self-reported intermediation attempts by the groups, and some evidence that these actions are associated with improvements in accounting and stock-market performance of the group affiliates. We suggest that the slow development of market intermediaries, in a manner suggested by institutional economics, and the attendant lack of reduction in transaction costs in primary markets, can explain these findings.