Internal markets and the endogenous formation of business groups

Production activities are sometimes organized within a single plant of a single stand-alone firm. Sometimes they are instead spread out across multiple plants of a single multidivisional firm. Some other times they are organized within firms affiliated to a business group, i.e. a network of independent legal entities controlled by a common owner. In cross-sectional data, such different organizational shapes are associated with large differences in economic outcomes: group-affiliated firms tend to be larger (on average 4 times), more likely to export and about 30% more productive than non-affiliated firms (Cestone et al., 2018). Why? How do business groups differ from multidivisional firms? What drives the choice between these different organizational structures? What determines the shape of complex business organizations, in terms of sectoral and geographical diversification? The project proposed here aims at shedding light on these issues by answering two central questions: (i)does the availability of internal capital and labor markets within complex organizations – such as business groups and multidivisional firms – endow their affiliated units with tools that are not available to their stand-alone counterparts, thereby allowing them to react differently, perhaps more promptly and effectively, to economic shocks? (ii)what is the nature of the process that drives production units into or out of complex organizations? Are production units that (self) select into complex organizations different from those that do not?