Business Groups Institutions and Firm Performance

We analyse the relationship between manufacturing firms’ short-run economic growth and the institutional environment at local level in Italy and Spain, by explicitly accounting for the role played by business group membership. We hypothesise a differential effect of local institutions on firm-level economic growth related to business group membership in line with the theoretical argument that business groups play a fundamental role in the presence of market imperfections and weak institutions. We also hypothesise a ‘substitution effect’ between local institutions and the organisational form characterising the business group (with its group-specific inter-firm relations), such that any advantage arising from business group membership is likely to diminish as local institutional quality improves. Our empirical results support the predicted associations. First, high-quality local institutions matter for independent firms only. Second, any advantage associated with (international) business group membership seems to disappear as the local institutional environment improves.