Look beyond the United States and Great Britain and you are likely to find networks of companies — ranging from Latin America’s grupos to India’s business houses to Japan’s keiretsu — that are integral parts of the global economy. For HBS associate professor Tarun Khanna, studying business groups and their role in emerging markets has been part of a larger effort to understand how local business environments influence company strategy.

Strategy scholars have often emphasized how industry- and firm-specific characteristics affect company choices. But, Khanna observes, location matters as well, since the economic environments of emerging markets such as Indonesia, Chile, India, or Mexico vary so greatly. Because business groups are fundamental to many economies, understanding how these networked organizations function also becomes important.

Khanna has been studying the causes and consequences of group affiliation in Asia and Latin America for several years, often with HBS professor Krishna G. Palepu. His current research focuses on several important aspects of business groups: their effect on entrepreneurial activity in emerging markets; the ways they undertake coordinated action despite the fact that they are often composed of diverse units; and the role families play in these organizations.

“It is important to recognize that emerging economies, unlike those of developed nations, typically lack many of the essential supporting institutions we tend to take for granted in the United States,” notes Khanna. “Court systems, contract law, stock markets, accounting standards, and other elements that facilitate entrepreneurship and growth are often weak, archaic, or entirely missing in these economies.”

Business groups, Khanna explains, can help fill some of these gaps in a nation’s infrastructure. They boost entrepreneurship by supplying seed capital for budding entrepreneurs, providing a range of support activities, and assisting in the distribution and marketing of goods and services. And if an entrepreneur decides to sell a business, one group or another is often a willing and able buyer, a valuable “exit” option when public capital markets are underdeveloped.

On the other hand, some groups’ close connections to a nation’s power structure may serve as a barrier to entry, stifling entrepreneurship and growth. “Through our ongoing work in Argentina and Brazil, as well as in several countries in Asia and Africa,” Khanna says, “we want to determine when groups enhance entrepreneurship and when they deter it.”

Although Khanna says there is still much to learn about business groups and how they affect economic development, his research has important implications for leaders in three distinct areas. First, he stresses, managers should not assume that conventional wisdom based on contemporary U.S. experience will transfer to developing countries unaltered. For example, highly diversified organizations may work poorly in advanced economies like the United States, but they sometimes deliver superior value in certain emerging markets, where their scope allows them to leverage their own resources to compensate for deficiencies in the economic support system.

Second, Khanna’s work suggests that the economic development that should be the overriding priority of policymakers in emerging markets cannot be achieved rapidly nor by government decree. After all, it took the United States a century to achieve its present level of development. Finally, agencies and multinational companies that operate in emerging economies should realize that the business environment they encounter in one developing country is likely to differ substantially in the next. Markets in Latin America and other emerging regions are not, in fact, cut from the same cloth.

Today, while grupos are thriving in many Latin American countries, governments in other parts of the world are responding to business groups in different ways. Although some nurture their growth, others neglect them, and still others attempt to banish them entirely, wary of their concentrated power and wealth. While curtailing business groups may sometimes be politically expedient, the leaders of developing nations will provide a greater service in the long run, Khanna argues, by focusing instead on building the infrastructure required to compete in a global economy.

Adapted from Working Knowledge: A Report on Research at Harvard Business School, Vol. IV, No. III.

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