Abstract
Business groups are sets of firms tied together by a centralized control mechanism, and they represent the most common form of business organization worldwide. Business groups have internal labor and capital markets that help them overcome institutional voids. Despite the abundant literature on the location of business groups across countries, little is known about the factors that explain the choice of a location of firms affiliated with (or controlled by) business groups within a country. Building on business group literature and agglomeration economics, we propose in this study that more firms are affiliated with business groups in regions with limited access to strategic resources, finance, and labor. Empirical results based on a large sample of privately held French firms support the idea that business group affiliation is more common in regions with limited access to the workforce. However, we could not find any evidence in support of the argument that the degree of regional financial development influences the likelihood of a business group affiliation. Overall, the study provides evidence that the way businesses are organized, for instance, as business groups, depends on the degree of resource scarcity of the locations in which firms are created.
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In that sense, BGs share a common attribute with conglomerates. However, BGs and conglomerates are distinct in at least one essential aspect. Firms affiliated with a BG are legally distinct, which is not the case for the divisions in a conglomerate. This means that firms affiliated with a BG can enter contracts by themselves. See Samphantarak (2007) for a detailed discussion of the differences between BGs and conglomerates.
One could question why an organization would decide to locate a new business entity in a resource-scarce region that appears to be, at least intuitively, a complicated hunting ground. In fact, entering peripheral regions instead of the largest cities is a common growth strategy for large and internationalized business organizations. (Shi et al. 2012). Resource-scarce regions are also commonly much less populated, and competition is less intense there and prices are higher (Atsom et al. 2011).
For the INSEE website, data are available at https://www.insee.fr/fr/statistiques/2521169. For the Bank of France, data are available at https://www.banque-france.fr/sites/default/files/webstat_pdf/cre_reg_fra_2176_fr_credits_regions_122017.pdf.
Information is often lacking or incomplete for overseas territories. Specifically, companies that operate in overseas territories are excluded from the analysis because information for the financial development variable is not available.
It is possible to run estimations at the regional level instead of the firm level. However, firm-level regressions provide us the option to include many firm-level controls that likely drive a BG affiliation. For instance, BGs may decide to acquire firms that exhibit specific characteristics.
The proportion of BG-affiliated firms is lower in the French population and close to 50% (Deroyon 2016). In fact, Amadeus has a relatively poor coverage of microfirms, which are less likely to be affiliated to a BG in France.
Given the nonresult in Hypothesis 2, we ran additional estimations by splitting the sample into quartiles of cash holdings, capital intensity, and capital expenditures. The nonresult in Hypothesis 2 was confirmed in each case. The results are unreported for brevity but available upon request.
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This research has been conducted as part of the “Réseau de recherche en entrepreneuriat”. The comments and suggestions of two anonymous reviewers and the editor, Maciej Workiewicz, are gratefully acknowledged. All remaining errors are the author’s own.
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Lefebvre, V. Business group affiliation in resource-scarce locations. J Org Design 12, 121–140 (2023). https://doi.org/10.1007/s41469-023-00145-x
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DOI: https://doi.org/10.1007/s41469-023-00145-x