THESIS
2016
viii, 43 pages : illustrations, maps ; 30 cm
Abstract
Do business groups drive poor allocative efficiency in emerging markets? Using a
recent large-scale highway development project in India, we study the relationship between
internal capital markets and efficiency of capital allocation in Indian business groups. We
show that there was significant capital reallocation across member firms within the group
which allowed group affiliated firms to respond faster than standalone firms in response
to upgraded connectivity. This capital reallocation was financed externally with group
firms crowding-out financing from the economy thereby imposing financial constraints on
standalone firms. These firms also showed lower profitability and appear to misallocate
capital following access to the road network. Our evidence is consistent with busin...[
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Do business groups drive poor allocative efficiency in emerging markets? Using a
recent large-scale highway development project in India, we study the relationship between
internal capital markets and efficiency of capital allocation in Indian business groups. We
show that there was significant capital reallocation across member firms within the group
which allowed group affiliated firms to respond faster than standalone firms in response
to upgraded connectivity. This capital reallocation was financed externally with group
firms crowding-out financing from the economy thereby imposing financial constraints on
standalone firms. These firms also showed lower profitability and appear to misallocate
capital following access to the road network. Our evidence is consistent with business
groups in developing countries driving poor allocative efficiency and inhibiting growth of
independent firms because of lack of finance.
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