Impact of industry sector on corporate diversification and firm performance: Evidence from Indian business groups

• Author: Saptarshi Purkayastha,Somnath Lahiri
• DOI: http://doi.org/10.1002/cjas.1333
• Published date: 01 March 2017
• Date: 01 March 2017

Impact of industry sector on corporate

diversification and firm performance: Evidence

from Indian business groups

Somnath Lahiri*

Illinois State University

Saptarshi Purkayastha

Indian Institute of Management Calcutta

Abstract

Prior business group (BG) studies implicitly assume that

corporate diversif‌ication-f‌irm performance relationships

are uniform across industry sectors. This generalization

may lead to research implications that are not equally true

for BG-aff‌iliated manufacturing and service f‌irms. Drawing

on strategy and marketing literature, this research

addresses this scholarly gap. Our empirical analysis of a

large sample of BG-aff‌iliated Indian f‌irms over a f‌ive-year

period (2004-2008) indicates that the inf‌luence of corporate

diversif‌ication on f‌irm performance is greater for aff‌iliated

service f‌irms than aff‌iliated manufacturing f‌irms. Results

also indicate that the inf‌luence of BG size and diversity on

diversif‌ication-f‌irm performance relationship varies signif‌i-

cantly depending on whether the focal f‌irm belongs to the

manufacturing or service sector. Firm’s share ownership

does not generate similar inf‌luence. Copyright © 2015

ASAC. Published by John Wiley & Sons, Ltd.

Keywords: corporate diversif‌ication, f‌irm performance,

business group, industry sector, services

Résumé

Les études antérieures sur les groupes d’entreprises (BG)

présupposent de façon implicite que d’un secteur industriel

àl’autre, les relations entre le rendement de l’entreprise et

la diversif‌ication des sociétés sont uniformes. Cette générali-

sation débouche sur des implications qui ne s’appliquent

guère aux entreprises de services et de fabrication aff‌iliées

aux BG. Le présent article s’appuie sur les travaux en

stratégie et en marketing pourcombler cette lacune. L’analyse

empirique d’un grand échantillon d’entreprises indiennes

aff‌iliées aux BG pendant cinq ans (2004-2008) indique que

l’inf‌luence de la diversif‌ication des sociétés sur le rendement

est plus grande pour les entreprises de services aff‌iliées et

moins grande pour les entreprises de fabrication aff‌iliées.

Les résultats montrent aussi que l’inf‌luence de la taille et de

la diversité des BG sur les relations entre la diversif‌ication

et la performance de l’entreprise varie considérablement

selon que l’entreprise centrale appartient au secteur de la

fabrication ou à celui des services. La propriété partagée de

l’entreprise n’exerce pas la même inf‌luence. Copyright ©

2015 ASAC. Published by John Wiley & Sons, Ltd.

Mots-clés : diversif‌ication des sociétés, rendement de

l’entreprise, groupe d’entreprises, secteur industriel, services

Business scholars continue to document wide interest in

the dynamics of business groups (BGs) and their aff‌iliated

f‌irms. One growth strategy that BG-aff‌iliated f‌irms regularly

implement is corporate diversif‌ication. Prior research has

examined how diversif‌ication impacts prof‌itability, company

valuation, and other performance parameters of aff‌iliated

f‌irms (Carney, Gedajlovic, Heugens, Essen, & Oosterhout,

2011; Kedia, Mukherjee, & Lahiri, 2006; Lee, Peng, &

Lee, 2008). In enriching this research stream, previous

studies have also examined how heterogeneous features of

BG, such as interf‌irm relationships, social ties, group size,

diversity, and share ownership (see George & Kabir,

2012), affect f‌irm performance. These works are indeed

insightful and increase our understanding of BG f‌irms’

diversif‌ication and subsequent implications. However, these

studies implicitly assume that the relationships they examine

are uniform across different industry sectors such as

manufacturing and services.

Extant research, particularly in strategy and marketing,

asserts that f‌irm behaviour and the resulting performance

greatly depends on whether a f‌irm belongs to the

manufacturing or service sector. Scholars argue that unique

properties of services such as intangibility, inseparability of

*Please address correspondence to: Somnath Lahiri, Associate Professor of

Management, Management and Quantitative Methods Department, College

of Business, Illinois State University, Normal, IL 61790-5580, USA. Email:

slahiri@ilstu.edu

Canadian Journal of Administrative Sciences

Revue canadienne des sciences de l’administration

34:77–88 (2017)

Published online 4 August 2015 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/CJAS.1333

Can J Adm Sci

34(1), 77–88 (2017)Copyright © 2015 ASAC. Published by John Wiley & Sons, Ltd. 77