Engineering Growth: Business Group Structure and Firm Performance in China's Transition Economy

Abstract

Business groups have received increasing attention from academics interested in interorganizational relations and their impact on firms. As part of industrial reform, the Chinese government began in the mid‐1980s to encourage firms to form business groups with structural characteristics that promised to enhance financial performance and productivity. Using 1988‐90 panel data on China's 40 largest business groups and their 535 member firms, the study finds that the presence and predominance of interlocking directorates and finance companies in business groups improved the financial performance and productivity of the groups' member firms. In addition, firms in groups with nonhierarchical organizational structures performed better than firms in hierarchical groups, suggesting that complete integration into a hierarchical organization is not an optimal strategy.