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Business groups as knowledge-based hierarchies of firms

Altomonte, Carlo, Ottaviano, Gianmarco, Rungi, Armando and Sonno, Tommaso (2021) Business groups as knowledge-based hierarchies of firms. CEP Discussion Papers (1804). Centre for Economic Performance, LSE, London, UK.

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Hierarchical differentiation is a cornerstone of the organizing process. In this paper, we do three things. First, exploiting a newly assembled dataset, we provide the first worldwide overview of the patterns of hierarchical differentiation across Business Groups (BGs), highlighting the co-existence of different hierarchical shapes. Second, we show how the different shapes can arise as optimal hierarchical structures in a knowledge-based model of BGs when subsidiaries' operations involve ubiquitous problem solving under parents' supervision. Three primitive characteristics of a BG determine its optimal choice of hierarchical structure: production efficiency and two dimensions of problem solving efficiency related to supervising knowledge creation and handling associated communication across subsidiaries. Third, we check the consistency of the model's predictions with the empirical patterns for Europe, the US, and the world. The model successfully passes the consistency test.

Item Type: Monograph (Discussion Paper)
Official URL:
Additional Information: © 2021 The Authors
Divisions: Centre for Economic Performance
Subjects: H Social Sciences > HD Industries. Land use. Labor
H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
JEL classification: D - Microeconomics > D2 - Production and Organizations > D23 - Organizational Behavior; Transaction Costs; Property Rights
L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L23 - Organization of Production
F - International Economics > F2 - International Factor Movements and International Business > F23 - Multinational Firms; International Business
L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L25 - Firm Performance: Size, Diversification and Scope, Age, Profit, and Sales
G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers; Acquisitions; Restructuring; Corporate Governance
Date Deposited: 28 Feb 2022 12:03
Last Modified: 01 Mar 2022 00:03

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