A temporal study of diversification, group affiliation and performance among Indian manufacturers

Building on the recent research about the role of business groups in remedying market failures, this paper examined the impact of diversification and group affiliation on firm performance. Set in the Indian context, it compares the influence of diversification, group affiliation and their interaction on firm performance before (1988) and after (1999) the country introduced dramatic market reforms (1991). Results show that in the pre-reform period while group affiliated diversifiers captured performance benefits, performance of unaffiliated diversifiers was negatively impacted. This suggests that the group structure exerted an important moderating effect on the diversification performance relationship. In the post-reform period marked by a decrease in market failures and an enhanced institutional infrastructure, the positive effect of group affiliation was absent. This underscores the central intermediation role that groups play in mitigating market failures is not as valuable in contexts where the incidence of such failure is low.