Performance impact of business group affiliation: An analysis of the diversification-performance link in a developing economy

To understand the performance implications of corporate strategies as conditioned by business group affiliations, we analyze the relation between corporate diversification and performance for 889 Indian firms. We find that diversified firms perform significantly worse than focused firms and that there exists a significant negative relation between the degree of diversification and firm performance. A comparative analysis of firms affiliated with Indian business groups and those affiliated with MNCs indicates that the sources of negative impact of diversification on performance are conditioned by the nature of a firm's affiliation. For multinational affiliates, diversification is associated with poor asset quality and asset management, which is an indicator of possible agency conflict. For domestic business group affiliates, diversification is associated with cost inefficiencies and poor performance. (C) 2006 Elsevier Inc. All rights reserved.