JBR-08253; No of Pages 8

Journal of Business Research xxx (2014) xxxxxx

Contents lists available at ScienceDirect

Journal of Business Research

Business groups and entrepreneurship in developing countries after reforms

Murali D.R. Chari a,, Jaya Dixit b
a
Lally School of Management, Rensselaer Polytechnic Institute, 110 8th Street, Troy, NY 12180, United States
b
Indian School of Business, Hyderabad, India

a r t i c l e i n f o a b s t r a c t

Article history: Drawing from the literature on markets and market development we develop hypotheses on the startup and
Received 25 October 2013 growth of formal business by business groups relative to independent entrepreneurs after reforms. We then
Received in revised form 12 December 2014 test the hypotheses in a large sample of rms that were started up after reforms in one large developing
Accepted 13 December 2014
countryIndia. Findings show that (a) the likelihood of formal business startup by business groups, relative to
Available online xxxx
independent entrepreneurs, declines with market development following reforms, (b) the likelihood of formal
Keywords:
business startup by business groups, relative to independent entrepreneurs, is greater in industries privatized
Business groups by reforms and in industries with greater foreign rm presence, and (c) formal businesses started by business
Reforms groups experience greater growth than formal businesses started by independent entrepreneurs.
Entrepreneurship 2014 Elsevier Inc. All rights reserved.
Developing countries
Market development
India

1. Introduction entrepreneurship in developing countries (Bruton et al., 2008). Despite

Starting and growing formal businesses, dened as privately owned
or publicly owned rms that draw or seek to draw signicantly on ex-
ternal resources, were very difcult in developing countries because of
their underdeveloped markets before these countries enacted economic
reforms (Leff, 1978, 1979). Business groups (BGs), which are collections
of rms with common ownership and control by a family, were partic-
ularly successful in starting and growing formal businesses in many of
these countries because they leveraged internal markets to supplement
and overcome the constraints of underdeveloped markets (Amsden &
Hikino, 1994; Leff, 1976). BGs, as a result, dominated formal business
and economic activities in a number of developing countries including
Argentina, Brazil, Chile, India, Malaysia, Mexico, Nicaragua, Pakistan,
South Korea, South Africa, Taiwan, and Turkey (Amsden & Hikino,
1994; Guillen, 2000; Khanna & Palepu, 2000b; Leff, 1976, 1978, 1979).
In recent years, a number of developing countries have enacted pro-
market economic reforms (hereafter called reforms) aimed at develop-
ing their markets to promote entrepreneurship and private enterprise
(Hoskisson, Eden, Lau, & Wright, 2000). As a result of these reforms,
these countries are becoming major economic forces in the world, and
entrepreneurship (including the startup and growth of formal busi-
nesses) has been credited with playing a key role in this development
(Bruton, Ahlstrom, & Obloj, 2008: 1). Noting the growing importance of
entrepreneurship in developing countries, and citing a paucity of re-
search on the topic, scholars have called for more research into
their widely acknowledged dominance in the startup and growth of for-
mal businesses before reforms, there is virtually no research to our
knowledge on the startup and growth of formal businesses by BGs in de-
veloping countries after reforms.
Who starts businesses and who succeeds in growing their busi-
nesses are important questions for scholars, entrepreneurs, and policy
makers (Shane, 2003). Relative to independent entrepreneurs, how
likely are BGs to start and grow formal businesses after reforms? We ex-
amine the startup and growth of formal businesses by BGs relative to in-
dependent entrepreneurs in developing countries after reforms. We
draw from the literature on markets and market development to ad-
vance hypotheses on the likelihood of formal business startup by BGs
relative to independent entrepreneurs following reforms, and the rela-
tive success of such startups. We then test the hypotheses on a large
sample of formal businesses started up in one large developing country
that has enacted reforms, India.
Our study makes important contributions as detailed in the
Discussion section. Briey, the study provides, to our knowledge, the
rst set of empirical ndings on startup and growth of formal businesses
by BGs in a developing country after reforms. The study also contributes
to the literature on BGs by identifying some sources of BG advantage
that persists after the reforms.
2. Background: entrepreneurial constraints and BGs in
developing countries

Corresponding author. Tel.: +1 518 669 9164. The institutional context, made up of a matrix of formal rules such as
E-mail addresses: Charim2@rpi.edu (M.D.R. Chari), Jaya_Dixit@isb.edu (J. Dixit). laws and regulations, informal norms, and the enforcement of rules,

http://dx.doi.org/10.1016/j.jbusres.2014.12.006
0148-2963/ 2014 Elsevier Inc. All rights reserved.

Please cite this article as: Chari, M.D.R., & Dixit, J., Business groups and entrepreneurship in developing countries after reforms, Journal of Business
Research (2014), http://dx.doi.org/10.1016/j.jbusres.2014.12.006
2 M.D.R. Chari, J. Dixit / Journal of Business Research xxx (2014) xxxxxx

signicantly impacts economic activity in a country (North, 1990). Re- determination of price and terms of contract (Coffee, 1984). Because of
strictive laws and regulations in developing countries were not support- market inefciency, access to internal markets would provide BGs an ad-
ive of markets, and the resulting deciencies in factor and product vantage in starting formal businesses in certain areas of the economy,
markets made startup and growth of formal businesses very difcult and in growing formal business startups. We develop these arguments
(Leff, 1978, 1979: 46). Underdeveloped factor markets made the mobi- below.
lization of capital, labor, and other production factors required to start
formal businesses difcult (Leibenstein, 1968). Venture capitalists
3.1. Market development following reforms and the startup of formal
who mobilize capital to fund formal business startups were non-
businesses by BGs
existent. Paucity of educational institutions left a void in the labor mar-
ket for trained managers and professionals (Khanna & Palepu, 2010).
Reforms are efforts to change the institutional context in support of
Absence of product market intermediaries made it difcult to obtain in-
market development and private enterprise (Hoskisson et al., 2000;
formation to make entrepreneurial decisions (Khanna & Palepu, 2010).
North, 1990). Reforms typically include measures that strengthen
Restrictive regulations, in addition, introduced bureaucratic barriers to
shareholder protection, deregulate labor restrictions, and liberalize
start formal businesses. These conditions led to pessimism about the
entry for product and factor market intermediaries (Chari & David,
prospects for startup and growth of formal businesses in developing
2012; Cuervo-Cazurra & Dau, 2009; Khanna & Palepu, 2000a). Greater
countries (Leff, 1979).
protection for shareholders contributes to equity market development
BGs were particularly successful under these conditions because
by increasing investor condence, which in turn increases access to
they were able to supplement and overcome the decient product and
and lowers the cost of capital (La Porta, Lopez-De-Silanes, Shleifer, &
factor markets. Specically, founders of BGs mobilized capital initially
Vishny, 1997). Development of equity markets also enables entrepre-
from their extended families and ethnic communities to start and oper-
neurs to defray startup risks. Entry liberalization for venture capitalists
ate multiple formal businesses (Leff, 1976). They subsequently lever-
enables these intermediaries to raise capital and fund startups. Entry
aged internal markets, created by pooling the resources of their
liberalization for educational institutions increases the availability of
various businesses, to start and grow additional formal businesses
trained managers and professionals. Entry and growth in the number
(Amsden & Hikino, 1994; Leff, 1978, 1979). To overcome talent market
of product and factor market intermediaries such as market research
voids BGs often ran their own management development programs
rms, consultants, and rating agencies increase the amount of informa-
(Khanna & Palepu, 2010). When faced with a lack of intermediary prod-
tion and intermediary services available through the market for entre-
ucts, BGs started new businesses to produce these products. Operating
preneurial decision making. The development of markets following
businesses in multiple industries generated internal information ows
reforms thus increases the availability of resources required to start for-
which helped reduce uncertainties regarding production and invest-
mal businesses.
ment decisions (Leff, 1979: 53). BGs adapted technologies imported
Market development, however, occurs gradually over time, rather
from developed countries to overcome deciencies in domestic tech-
than immediately, after reforms (Ghemawat & Khanna, 1998). This is
nology sources (Amsden & Hikino, 1994). BGs were also better at deal-
because institutional change, including those intended to support mar-
ing with bureaucratic hurdles as their multiple businesses provided
ket development, is overwhelmingly incremental (North, 1990). While
economies of scope in lobbying (Ghemawat & Khanna, 1998; Leff,
changes in formal rules can, at least in theory, be enacted quickly,
1978: 668). Finally, repeated entry into new businesses provided BGs
changes in the other two components of the institutional matrix are
extensive experience in the entrepreneurial process (Amsden &
necessarily incremental (North, 1990). Informal norms that extend
Hikino, 1994; Guillen, 2000).
and complement the new formal rules only evolve gradually over
BGs, thus, were credited with overcoming the entrepreneurial con-
time through repeated exchange by organizations within the new poli-
straints of the pre-reform era. The success of BGs has spawned a large
cy framework (North, 1990). Supervisory institutions such as regulatory
body of literature examining their effects on rm performance, risk
agencies that enforce the new rules also evolve only over time through a
sharing, innovation, and socio-economic welfare (Colpan, Hikino, &
process of learning by doing (Panagariya, 2008). Even the new formal
Lincoln, 2010; Khanna & Palepu, 2000b; Singla & George, 2013).
rules often evolve as regulatory agencies discover changes necessary
Recognizing the importance of well-developed markets for econom-
to make the rules enforceable.
ic growth, a number of developing countries have enacted reforms to
The availability of resources required to start businesses therefore
transform their institutional contexts in support of market development
can be expected to increase as markets develop over time following re-
and private enterprise (Hoskisson et al., 2000). What effect does this
forms rather than immediately after reform initiation. An increase in re-
have on the startup and growth of formal businesses by BGs?
sources available through markets will favor formal business startup by
independent entrepreneurs who can now more easily marshal the nec-
3. Hypotheses
essary resources through the markets. In addition, as the availability of
resources through markets increases, BGs' advantages in starting formal
We draw from the literature on markets and market development
businesses that stem from their ability to use internal markets to over-
for our hypotheses. Our main arguments are as follows. Markets evolve
come or supplement the underdeveloped markets would decline. The
gradually following reforms and hence the startup and growth of formal
above arguments suggest a decline in the relative likelihood of formal
businesses by BGs after reforms are best observed as markets develop
business startup by BGs as markets develop following reforms.
over time (North, 1990). The development of markets eases pre-
reform era constraints by increasing the availability of resources Hypothesis 1. The likelihood of formal business startup by BGs, relative
through markets, and this would lower the advantages of BGs in starting to independent entrepreneurs, declines with market development fol-
formal businesses relative to independent entrepreneurs. lowing reforms.
Accessing resources from markets however is not universally advan-
tageous because markets are not always efcient. Specically, when
measurement problems are high, arriving at price and terms of contract 3.2. Market inefciency and the startup of formal businesses by BGs
are difcult for market participants, and therefore markets will be inef-
cient (Akerlof, 1970; Alchian & Demsetz, 1972; Coase, 1937; Williamson, As noted by Coase (1937), Alchian and Demsetz (1972), and
1979). Markets are also inefcient when the reliability of supply is im- Williamson (1979), even within well-developed market economies
portant (Bernanke & Gertler, 1987), and when the need for secrecy pre- there are contexts where measurement problems render markets inef-
vents sufcient disclosure to aid measurement and thereby the cient. Thus, while the development of markets suggests a decline in

Please cite this article as: Chari, M.D.R., & Dixit, J., Business groups and entrepreneurship in developing countries after reforms, Journal of Business
Research (2014), http://dx.doi.org/10.1016/j.jbusres.2014.12.006
 M.D.R. Chari, J. Dixit / Journal of Business Research xxx (2014) xxxxxx
the relative likelihood of formal business startup by BGs overall (as ar-
gued above), there would be pockets of the economy where, due to
measurement problems, markets are inefcient and therefore internal
markets provide BGs an advantage in starting formal businesses. We
argue that starting formal businesses in response to two new opportu-
nities accompanying reforms represents such pockets.
In the pre-reform period, developing country governments re-
served certain industries for state owned enterprises because these
industries were considered critical to the economy, and because
these industries involved complex operations and large investments
which the governments felt were beyond the capacity of private en-
terprises. With reforms, many of these industries are privatized
(i.e., de-reserved) because of the governments' revised assessment
that private rms are better able to unleash the growth potential of
these industries (GOI, 1991).
While privatized industries are not new industries, they are new
to private enterprise. The lack or rarity of relevant predecessors
(i.e., private enterprises), and the consequent dearth of existing strate-
gies to observe and evaluate, would therefore render envisioning viable
strategies for these industries more difcult (Carroll & Delacroix, 1982).
BGs would have an advantage in envisioning strategies in these indus-
tries because their prior startup experience would provide a frame of
reference and the absorptive capacity to better interpret new informa-
tion and make entrepreneurial conjectures in these new domains
(Shane, 2003). Experience in the entrepreneurial (i.e., startup) process
is tacit, intertwined with the organizational context where it arose,
and therefore difcult to measure, price, and access through the market
(Kogut & Zander, 1993). BGs can access this experience through their in-
ternal markets by moving employees with the relevant experience to
the new startup (Guillen, 2000).
The market for other resources such as capital is also likely to be
inefcient in this context. The rarity or lack of relevant predecessor
rms would make returns from the proposed venture difcult for
market participants to measure and evaluate, and therefore arrive
at price and terms of contract (Akerlof, 1970; Alchian & Demsetz,
1972). Access to internal markets would provide BGs an advantage
in this context both because they provide an internal source for the
resources and because their existing resources (i.e., the pooled as-
sets, track records, and relationships) can be leveraged to gain better
access to the markets. BGs, for example, can use their demonstrated
success in prior ventures to signal credibility to resource providers.
BGs have existing networks of social ties with resource providers
for their other businesses which they can leverage. BGs also have
the advantage of using guarantees from existing businesses to as-
suage resource provider skepticism. Finally, to the extent bureau-
cratic hurdles remain in these industries, their economies of scope
in lobbying will provide BGs an advantage in overcoming these hur-
dles. For all of these reasons, we expect that BGs would have an ad-
vantage in starting formal businesses in industries privatized by
reforms.
Hypothesis 2. The likelihood of formal business startup by BGs, relative
to independent entrepreneurs, is greater in industries privatized by
reforms.
Another source of opportunities accompanying reforms involves
new markets and market growth created by foreign rms entering or
scaling-up their presence in developing countries. A number of foreign
rms enter or scale up their presence in developing countries following
reforms (Bhattacharya & Michael, 2008). Foreign rms introduce new
and technologically superior products to developing countries, which
create new markets and expand potential market size (Khanna &
Palepu, 2006). Because of their inability or unwillingness to modify
their products and business models to developing countries, foreign
rms limit themselves to upper income segments and large cities
where affordability of their higher priced products is greatest (Khanna
Please cite this article as: Chari, M.D.R., & Dixit, J., Business groups and entrepreneurship in developing countries after reforms, Journal of Business
Research (2014), http://dx.doi.org/10.1016/j.jbusres.2014.12.006
3
& Palepu, 2006). Awareness of the new products, however, creates a
large unmet demand for these new products among lower income seg-
ments and markets outside large cities, which can be effectively ad-
dressed only at much lower price points (Khanna & Palepu, 2006).
This unmet demand offers signicant opportunities for BGs and others
to enter these industries.
Entering these markets will require new business models to produce
and sell the new and technologically superior products at much lower
prices. The newness of these markets and the consequent absence of
predecessors would make it difcult for entrepreneurs to envision suit-
able strategies. BGs have extensive experience in adapting imported
technologies and products to local market needs from the pre-reform
era. This prior experience will provide BGs a frame of reference and
the absorptive capacity to interpret new information and make entre-
preneurial conjectures and envision strategies for these new markets
(Shane, 2003). As argued earlier, experience is difcult to measure,
price, and hence access through the markets. Internal markets on the
other hand enable BGs to draw on this experience.
Due to the paucity of indigenous technology sources, producing the
technologically superior products at much lower prices would likely re-
quire the acquisition and adaptation of imported technologies. Given
uncertainties over enforcement, technology access through markets is
riskyparticularly in developing countries. BGs would have an advan-
tage in accessing technology in this context because their experience
with importing technology in the pre-reform era and their ability to
stake the reputation of the entire group of businesses would help allay
technology provider concerns (Khanna & Palepu, 2000b). Reputation
and trust are tacit assets generated over time, and therefore not easily
accessed by independent entrepreneurs through the market. The new-
ness of these markets and the consequent absence or rarity of predeces-
sors will also make it difcult for the providers of other relevant
resources to measure and evaluate the venture and hence arrive at the
price and terms of the contract (Akerlof, 1970; Alchian & Demsetz,
1972). As a result the market will be inefcient for these resources as
well. As elaborated in developing the previous hypothesis, internal mar-
kets will provide BGs an advantage in this context, both by providing an
internal source for the resources and by enabling better access to the
market for these resources. For all these reasons, BGs would have an ad-
vantage in starting formal businesses in industries where foreign rms
are successful and hence have a greater presence.
Hypothesis 3. The likelihood of formal business startup by BGs, relative
to independent entrepreneurs, is greater in industries with a greater
foreign rm presence.
3.3. Growing the formal businesses
The factors that lead to formal business startups are not necessarily
the ones that determine their growth. The very act of starting a business
causes information about the entrepreneurial opportunity to diffuse
and invites competition (Shane, 2003). Successful growth of formal
business startups therefore depends not only on the ability to exploit
opportunities, but also on protecting entrepreneurial gains from com-
petition (Ireland, Hitt, & Sirmon, 2003). Entrepreneurial gains can be
protected from competition when opportunities are exploited by
leveraging resources in a manner that is hard for competitors to imitate
(Barney, 1991). As we argue below, seeking resources while limiting in-
formation leakage to prevent competition makes markets inefcient.
Growing formal business startups also requires reliable access to re-
sources, and markets can be unreliable. Access to internal markets
provides BGs advantages in overcoming these inefciencies, and conse-
quently in growing formal business startups.
First, the conict between the resource providers' need for disclo-
sure of relevant information to arrive at price and terms, and the entre-
preneurs' need to limit leakage of sensitive information would mean
4 M.D.R. Chari, J. Dixit / Journal of Business Research xxx (2014) xxxxxx
that markets will be inefcient in providing the resources necessary for
growth. Internal markets within BGs can help overcome this inefcien-
cy both by providing an internal source for the required resources and,
as explained earlier, by facilitating access to markets at better terms.
For example, BGs can use guarantees from their existing businesses to
negotiate access to capital without disclosing sensitive information. Sec-
ond, growth depends on the appropriate timing of investments
(McGrath, 1996). Investing too much too soon risks greater losses if un-
certainties do not resolve favorably, and investing late risks losing early
mover advantages. Appropriate timing of investments therefore re-
quires that investments are made as critical uncertainties are resolved
(McGrath, 1996). Markets are subject to cycles, and funds through mar-
kets can become unavailable when startups need them for investment
(Bernanke & Gertler, 1987; Rajan, 1994). Internal markets within BGs
can help overcome this limitation by providing funds to facilitate invest-
ment timing that is dictated by the resolution of critical uncertainties
rather than by the vagaries of market cycles.
Finally, knowledge of how to manage and grow startups is tacit and
hence is best learned by experience (Shane, 2003). Supporting this idea,
research on serial and other habitual entrepreneurs shows that prior en-
trepreneurial experience is an important predictor of startup growth
and success (Eesley & Roberts, 2006). BGs, having grown by repeatedly
starting businesses, are the quintessential habitual entrepreneurs in de-
veloping countries. Their greater experience with the entrepreneurial
process would therefore provide BGs an advantage over independent
entrepreneurs in successfully growing formal business startups. As ar-
gued earlier, experience is tacit and difcult to measure and therefore
inefcient to access through markets. BGs can access this resource
though their internal markets by moving people with the relevant expe-
rience to the focal startup. For all the above reasons, BGs would have an
advantage in growing formal business startups.
Hypothesis 4. Formal businesses started by BGs experience greater
growth than formal businesses started by independent entrepreneurs.
4. The Indian context
India followed a socialist economic policy from its Independence in
1947. The policy involved extensive restrictions on rms, including re-
quiring entrepreneurs to obtain licenses from the government to start
businesses, expand capacity, and even change product range. Foreign
rm entry and operation were also restricted. In addition, several indus-
tries were reserved exclusively for state owned enterprises. These prac-
tices, often referred to as the License Raj, severely constrained the
development and functioning of markets and dampened entrepreneur-
ship and private enterprise (Chari & Banalieva, 2014).
In 1991, India initiated pro-market economic reforms to develop
markets and promote private enterprise (Chari & David, 2012). The
need for licenses to start businesses was abolished except for a short
list of industries with safety and security implications; the requirement
of government permission to expand capacity and change product
range was repealed; restrictions on foreign rm entry and operations
were liberalized; all but a few industries previously reserved for the
State were opened to private enterprise; shareholder protections were
strengthened, and supervisory institutions were created (Panagariya,
2008). These changes have transformed the economy substantially
from the restrictive License Raj to a more market oriented economy
contributing to the development of markets and the strengthening of
private enterprise and entrepreneurship (Panagariya, 2008). To be
sure, some aspects of the economy are not fully open and bureaucratic
hurdles remain despite reforms. Nevertheless, reforms have substan-
tially freed-up the economy from the shackles of government control,
and have helped propel India from a laggard to one of the leading
emerging economies in the world (Panagariya, 2008). India, therefore,
is an appropriate and interesting context to test our hypotheses.
Please cite this article as: Chari, M.D.R., & Dixit, J., Business groups and entrepreneurship in developing countries after reforms, Journal of Business
Research (2014), http://dx.doi.org/10.1016/j.jbusres.2014.12.006
5. Methods, data, and measures
5.1. Methods
We estimate a logistic regression model of the following general
form to test Hypotheses 1 through 3. The model is estimated on a sam-
ple of formal business startups in India from 1992, the rst year after the
country enacted reforms, to 2008 (Chari & David, 2012).
BG affiliate b0 b1 market development b2 dereserved industry
b3 foreign firm presence b4n controls e:
BG afliate in the model is a binary variable with value 1 if the
startup is by a BG and 0 if the startup is by an independent entrepre-
neur. Market development (dened in the Measures section) repre-
sents the level of market development in the country in the year of
the startup. De-reserved industry is an indicator variable with value 1
if the startup is in an industry that was removed from the list of indus-
tries reserved for the State as part of the reforms, and 0 otherwise. For-
eign rm presence represents the extent of foreign rm sales in the
industry in the year of the startup. Controls in the model represent
other factors that may inuence the dependent variable. Specically,
BGs may have a prior propensity to compete in certain industries. We
control for this by using the ratio of BG rms to total number of rms
in the industry in the year before reform initiation. We also control for
industry sector and the year of the startup. We control for industry sec-
tor rather than more nely dened industries because of the latter's cor-
relation with the de-reserved industry variable. Hypothesis 1 expects
the likelihood of formal business startup by BGs relative to independent
entrepreneurs to decline with market development following reforms.
A negative and signicant coefcient b1 in the model will support the
hypothesis. Hypothesis 2 expects that the likelihood of formal business
startup by BGs relative to independent entrepreneurs is greater in de-
reserved industries. A positive and signicant b2 in the model will sup-
port the hypothesis. Hypothesis 3 expects that the likelihood of formal
business startup by BGs relative to independent entrepreneurs is great-
er in industries with a greater foreign rm presence. A positive and sig-
nicant coefcient b3 in the model will support the hypothesis.
To test Hypothesis 4 we estimate a regression model of the following
general form.
Growth b0 b1 BG affiliate b2n controls e:
Growth, in the above model, represents the growth of the startup in
the rst three years following the commencement of business. BG afl-
iate is a binary variable with value 1 if the startup is by a BG and 0 if the
startup is by an independent entrepreneur. Other variables that may
also have an impact on the startup's growth, namely total assets of the
startup in the rst year of operation, industry of the startup, the level
of market development in the startup year, and year dummies to cap-
ture unobserved time period effects, are included as controls.
Hypothesis 4 expects that formal businesses started by BGs experience
greater growth than formal businesses started by independent entre-
preneurs. A positive and signicant coefcient b1 in the model will sup-
port the hypothesis. Since some of the startups may not have data to
compute growth because they went out of business, or were acquired
by other businesses, or were started after 2005 and our dataset ends
in 2008, there is the possibility of regression results being inuenced
by this selection/survivor bias. We use a Heckman type estimation to
control for this bias.
5.2. Data
The Center for Monitoring the Indian Economy (CMIE) is the prima-
ry source of our data. CMIE is a reputed source, and has been used exten-
sively in prior research (Elango & Pattnaik, 2013). Our interest in this
 M.D.R. Chari, J. Dixit / Journal of Business Research xxx (2014) xxxxxx 5

Table 1a
Formal business startups by industry sector and year.

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Total

Agriculture, shing & mining 0 3 15 38 15 4 7 12 6 6 8 35 21 11 15 3 0 199

Manufacturing 6 74 170 290 132 69 111 189 158 105 103 274 168 111 75 21 8 2064
Power & construction 0 5 11 18 22 7 18 19 18 22 37 34 31 29 33 19 12 335
Retail & wholesale 0 9 27 55 42 32 41 41 40 41 52 192 106 50 41 10 7 786
Financial services 0 10 70 220 111 68 59 71 47 88 115 343 295 113 91 29 18 1748
Non-nancial services 2 7 25 59 52 29 42 93 108 92 103 331 228 130 132 110 44 1587
Total 8 108 318 680 374 209 278 425 377 354 418 1209 849 444 387 192 89 6719

paper is on formal business startups. A distinguishing characteristic of
formal businesses is that, because they draw or seek to draw signicant-
ly on external resources, they prepare and disclose their audited nan-
cial information to fulll their statutory obligations and/or to inform and
attract external resource providers. While it does not cover all business
in the economy, CMIE is among the more comprehensive sources of
data on private and public rms that prepare and disclose their audited
nancial statements with over 19,000 privately owned and publicly
traded rms in the database. The CMIE data therefore is well suited for
our study. We begin with the population of all rms listed in CMIE be-
tween 1989 and 2008. We then select rms for which CMIE lists the
year of incorporation as 1992 or later (7807 rms)India enacted re-
forms in 1991. We then cross check the year of incorporation listed in
CMIE manually using company sources and their lings with the gov-
ernment. In the vast majority of cases, the year of incorporation report-
ed in CMIE corresponded with the year of incorporation or the year of
commencement of business found through our manual check. In a
small fraction of cases (about 7%) we found that the rm had been in op-
eration before the year of incorporation reported in CMIE. We dropped
these rms from our sample. The remaining startups included 532 that
were owned by foreign rms or the State. Since our focus is on private
enterprise by domestic rms, we drop these 532 startups to arrive at
our nal sample of 6719 formal business startups.
Entrepreneurial startups have a high failure rate, and a large fraction
of startups may not survive beyond their 3rd year (Shane, 2009). Not all
rms that cease to exist can be considered to have failed, however, since
some may have been successful but acquired by another rm. Since we
require data for four years to compute our growth variable, our sample
for testing Hypothesis 4 is a subset of the 6719 formal business startups
(specically, 3128 formal business startups) for which data on 4 years of
operation are available. To get a sense for the fate of the rest of the rms,
we tracked information from public sources for a randomly chosen sam-
ple of 1554 rms. The vast majority of the rms (about 79%) appear to
have ceased operations. About 3% of the rms were acquired or merged
into another rm, and we could not nd any information on the rest
(about 17%) of the rms.
5.3. Measures
CMIE classies rms as afliates of BGs, or non-BG rms, the accura-
cy of which has been independently veried (Khanna & Palepu, 2000b).
No rm is afliated to more than one BG. We measure BG afliation of
the startup (BG afliate in our models and tables) using an indicator var-
iable with value 1 if the startup rm is classied by CMIE as afliated to a
BG and 0 otherwise. Since our sample excludes startups by others in the
economy besides BGs and independent entrepreneurs, a value of 0 on
our measure of BG afliate represents startups by independent entre-
preneurs. We track seven indicators of market development, namely
the ratio of stock market capitalization to GDP, the number of portfolio
managers, the number of credit rating agencies, the number of venture
capital rms, the number of colleges for general education, the number
of colleges for professional education, and the number of rms engaged
in providing information and other business services, each year, to mea-
sure Market development. These indicators measure the extent of devel-
opment in capital, labor, and product markets, and are similar to ones
used in prior research (Khanna & Palepu, 2000a). Appendix A lists the
indicators and data sources. The seven indicators are highly correlated
and we therefore take the rst principal component of the seven indica-
tors as our measure of market development. The rst principal compo-
nent accounts for a large proportion of the variance (78%) in the data
indicating that it adequately captures the seven indicators. Consistent
with our arguments in this paper, and the observation of other scholars
(Khanna & Palepu, 2000a), the measure of market development shows a
statistically signicant upward slope with time following reforms.
A number of industries were reserved for state owned enterprises
before the reform initiation in 1991. All but three of these have been
de-reserved as part of the reforms. Some of the industries were de-
reserved in 1991 at the outset of reforms, and others were de-
reserved in subsequent years as part of the reforms. We obtain informa-
tion on de-reservation from relevant agencies of the Indian government,
and construct an indicator variable to measure de-reserved industry with
value 1 if the startup was in an industry that was de-reserved by reforms
and 0 otherwise. Foreign rm presence is measured as sales of foreign
rms in the industry divided by total sales in the industry, in the year
of the startup. CMIE identies foreign rms or subsidiaries of foreign
rms, which we use to identify foreign rms in the industry (Chari &
David, 2012). Dummy variables, one for each sector, namely agriculture,
shing and mining, manufacturing, power and construction, nancial
services, and non-nancial services, are used to measure the industry
sector. We control for unobserved time period effects using year
dummies. Prior propensity of BGs to compete in industries is measured
as the ratio of the number of BG afliated rms in each industry to the
total number of rms in the industry in 1990the year before the re-
form initiation.
With respect to variables in our model to test Hypothesis 4, Growth
of the startup is measured as the average annual change in total assets
of the startup in the three years following the rms' rst year of opera-
tion. We winsorize the variable at the 1st and 99th percentiles to avoid
undue inuence from extreme values. BG afliation of the startup is
measured as described earlier. The growth of the startup may be inu-
enced by industry. We control for industry using dummy variables,
one for each four digit industry. Growth could be inuenced by the ini-
tial size of entry. We control for this using total assets of the startup in its
rst year of operation (initial asset size). Economic conditions at the time
of entry may also inuence growth. We therefore use the level of market
development in the startup year, and year dummies as additional
controls.
6. Results
Table 1a shows the distribution of formal business startups in the
sample across industry sectors and years. Table 1b shows the proportion
of formal business startups in each industry sector started by BGs and
independent entrepreneurs. Table 2 shows means, standard deviations,
and correlations between variables. The correlations between indepen-
dent variables are low. Multicolinearity, therefore, is unlikely to bias our
results.
Table 3 shows test results for hypotheses 13. Model 1 includes just
the control variables. In models 2, 3, and 4, we add each independent
variable by itself to test Hypotheses 1, 2 and 3 respectively. Model 5 is

Please cite this article as: Chari, M.D.R., & Dixit, J., Business groups and entrepreneurship in developing countries after reforms, Journal of Business
Research (2014), http://dx.doi.org/10.1016/j.jbusres.2014.12.006
6 M.D.R. Chari, J. Dixit / Journal of Business Research xxx (2014) xxxxxx
Table 1b
Share of formal business startups in each industry sector by business groups (BGs) and in-
dependent entrepreneurs (IEs).
BG's share
Agriculture, shing & mining 15%
Manufacturing 21%
Power & construction 36%
Retail & wholesale 20%
Financial services 21%
Non-nancial services 24%
the full model with all the independent variables added together. The
results are consistent across all models, and we interpret the full
model. The Chi2 statistic is signicant indicating a good model t.
With respect to control variables, prior propensity is not signicant.
The tests for joint signicance shows that the year dummies as a
group and industry sector dummies as a group are signicant. With re-
spect to the variables of interest, the coefcient of market development
is signicant and negative supporting Hypothesis 1. The coefcients of
both de-reserved industry and foreign rm presence are signicant
and positive supporting Hypotheses 2 and 3 respectively.
Table 4 shows test results for Hypothesis 4. We use a Heckman re-
gression model to control for potential selection/survivor bias. The
model rst estimates the inverse mills ratio associated with the proba-
bility that a startup is part of our sample of 3128 that survived to be in-
cluded for our growth analysis, based on all independent variables in
the model and the ratio of debt to assets of the rm in its rst year of op-
eration. The model then incorporates this inverse mills ratio in estimat-
ing the regression model for growth. Model 1 includes only the control
variables. In model 2 we add BG afliate to test Hypothesis 4. The model
has a signicant Chi2 statistic indicating a good model t. With respect
to control variables, the level of market development exerts a signicant
positive inuence and initial asset size exerts a signicant negative in-
uence on growth. The tests for joint signicance shows that the year
dummies as a group and the industry dummies as a group are also sig-
nicant. With respect to the hypothesized variable, the coefcient of BG
afliate is signicant and positive supporting Hypothesis 4.
7. Discussion
Our results show the following. First, the likelihood of formal busi-
ness startup by BGs relative to independent entrepreneurs declines as
markets develop following reforms. Second, the likelihood of formal
business startup by BGs relative to independent entrepreneurs is great-
er in industries privatized by reforms and in industries with a greater
foreign rm presence. Third, formal businesses started by BGs experi-
ence greater growth than those started by independent entrepreneurs.
Table 2
Means, standard deviations, and correlations.
Panel A: startup model variables
Mean
1 Business group afliate 0.22
2 Market development 0.25
3 De-reserved industry 0.08
4 Foreign rm presence 0.08
5 Prior propensity 0.58
N = 6719. Correlations larger (smaller) than 0.03 (0.03) are signicant at p b 0.05. Industry sector and year dummies not included in the interest of brevity.
Panel B: growth model variables
Mean
1 Growth 5.86
2 Business group afliate 0.26
3 Initial asset size 31.10
4 Market development 0.42
N = 3128. Correlations larger (smaller) than 0.04 (-0.04) are signicant at p b 0.05. Industry and year dummies not included in the interest of brevity.
Please cite this article as: Chari, M.D.R., & Dixit, J., Business groups and entrepreneurship in developing countries after reforms, Journal of Business
Research (2014), http://dx.doi.org/10.1016/j.jbusres.2014.12.006
Since underdeveloped markets set the stage for BGs' advantages in the
startup and growth of formal businesses in the pre-reform era, a nave
extension would suggest that, as markets develop after reforms, BGs'
IE's share advantages in the startup and growth of formal businesses would de-
85% cline. Our ndings above, however, show a more complex dynamic,
79% with BGs having advantages in starting formal businesses in some
64% areas and having advantages in growing formal business startups,
80%
even though their share of formal business startups in the economy
79%
76% declines.
As pointed out by Baumol (1993), a good theoretical analysis can
provide insight into and explain outcomes that are not easily accessible
with nave analysis. Our analysis which recognizes both the benecial
role of market development in increasing resource availability, and the
inefciencies of markets under certain circumstances, provides an ex-
planation for the more complex dynamic that we observe. On the one
hand, the greater availability of resources through markets, as the
nave analysis would indicate, explains the reduction in the share of for-
mal business startups by BGs as markets develop. On the other hand,
market inefciencies due to measurement problems explain why inter-
nal markets provide BGs with advantages in starting formal businesses
in the two particular areas of the economy. Similarly, market inefcien-
cies triggered by measurement problems, the need to limit disclosure of
sensitive information, and the need for reliable funds explain why inter-
nal markets provide BGs advantages in growing formal business
startups.
Our study contributes to the literature on entrepreneurship in devel-
oping countries and to the literature on BGs. Who starts businesses and
to what effect are important questions in entrepreneurship. We provide
the rst set of answers on formal business startups by BGs relative to in-
dependent entrepreneurs, and the growth of such startups, in a devel-
oping country after reforms. The decline in the proportion of formal
business startups by BGs following reforms that we nd shows a broad-
ening in the base of entrepreneurs, and underscores the importance of
independent entrepreneurs for formal business startup after reforms.
For policy makers, the broadening of the base of entrepreneurs suggests
that their intent to stimulate entrepreneurship through reforms has
been successful. Relatively little is known in the literature about inde-
pendent entrepreneurs in developing countries. Our nding that the
importance of independent entrepreneurs for formal business startup
is not matched by the success of their startups, therefore, suggests an ur-
gent need for scholars to study this population of entrepreneurs and the
various obstacles they may face in growing their formal business
startups. Our nding of BGs' advantages in starting formal businesses
in the two areas of the economy also holds interesting implications. Spe-
cically, as we argued, market inefciencies make these opportunities
more difcult for independent entrepreneurs to exploit. These opportu-
nities, consequently, would be underexploited in the absence of BGs.
Std. dev. 1 2 3 4
0.41
1.72 0.07
0.27 0.10 0.03
0.10 0.05 0.14 0.07
0.23 0.01 0.05 0.10 0.13
Std. dev. 1 2 3
38.39
0.44 0.15
169.54 0.03 0.17
1.19 0.04 0.03 0.00
 M.D.R. Chari, J. Dixit / Journal of Business Research xxx (2014) xxxxxx 7

Table 3 our results may also hold in other developing countries that have
Results for Hypotheses 13: likelihood of formal business startup by BGs. enacted reforms. Further research using samples from other developing
Model 1 Model 2 Model 3 Model 4 Model 5 countries, however, will be necessary to conrm this expectation.
Market development 4.45** 4.50**
(3.13) (3.16) 8. Conclusion
De-reserved industry 0.66*** 0.81***
(6.16) (7.35) Our study shows that the environment for entrepreneurship chang-
Foreign rm presence 1.65*** 2.20***
es as markets develop after reforms. The proportion of formal business
(4.65) (6.05)
Prior propensity 0.04 0.040 0.08 0.03 0.00 startups by BGs in the economy declines as a result. The BGs, however,
(0.25) (0.26) (0.48) (0.20) (0.03) have advantages in starting formal businesses in certain areas, and in
Industry sector dummies Included Included Included Included Included growing their formal business startups. The ndings enrich our under-
Year dummies Included Included Included Included Included standing of factors inuencing startup and growth of formal businesses
Constant 1.64*** 18.93** 1.70*** 1.68*** 19.02**
(8.71) (2.90) (9.00) (8.91) (2.90)
in developing countries after reforms and shed light on some sources of
Chi2 221.2 234.5 257.5 242.4 307.3 BG advantage that persists after the reforms.
Log likelihood 3437.1 3430.4 3418.9 3426.4 3394

N = 6719. * p b 0.05, ** p b 0.01, *** p b 0.001; all two tailed tests. All Chi2 values are sig- Acknowledgments
nicant at p b 0.001. t values in absolute numbers are in parentheses.
The authors thank Elitsa Banalieva, Associate Professor at North
Eastern University, and Shyam Kumar, Associate Professor at Rensselaer
BGs therefore play a more limited but important role in starting formal Polytechnic Institute, for helpful comments on the earlier drafts of the
businesses after reforms. manuscript. The authors also thank Sri Raghavan, CEO of BizSciences
Our study also contributes to the literature on BGs. Based on the ob- for helpful comments and suggestions.
servation that BGs are prevalent in countries with underdeveloped mar-
kets, research attributed BG advantages and existence to their ability to Appendix A. Items (indicators) measuring market development
bridge voids in markets. As a corollary, as markets evolved following re-
forms, scholars expected the advantages of BGs to erode and the groups
to become irrelevant (Khanna & Palepu, 1999: 126). Despite some evi- Item Aspect of market Source
dence that the performance advantages of groups erode, there is little development

evidence for BGs' imminent demise and a number of authors have called Ratio of stock market Capital market The World Bank
for research to explain their continuing presence (e.g., Colpan et al., capitalization to GDP
Number of portfolio Capital market Handbook of statistics on the
2010). Our analysis shows that their extensive experience with the en-
managers Indian securities market, pub-
trepreneurial process and their access to internal markets continue to lished in 2009 by the Securities
confer advantages in starting formal businesses in certain areas of the and Exchange Board of India
economy and in growing formal business startups. Given the surge in Number of credit rating Capital market Handbook of statistics on the
agencies Indian securities market, published
entrepreneurship in developing countries after reforms (Bhattacharya
in 2009 by the Securities and Ex-
& Michael, 2008), the continuing advantages that we identify contribute change Board of India
to explaining, at least partially, the presence and relevance of BGs after Number of venture capital Capital market Securities and Exchange Board
reforms. rms of India
There are limitations to our study that can be addressed in future re- Number of colleges for Labor market Statistics of higher and technical
general education education, published in the year
search. The availability of rm level data on a large sample of formal
2011 by the Ministry of Human
business startups makes India an ideal context to test our hypotheses. Resource Development,
As in India, BGs used similar mechanisms to overcome entrepreneurial Government of India
constraints and dominate the formal business landscape in many Number of colleges for Labor market Statistics of higher and technical
professional education education, published in the year
other developing countries. It is therefore reasonable to expect that
2011 by the Ministry of Human
Resource Development,
Government of India
Table 4
Number of rms engaged in Product market The data base of companies in the
Test results for Hypothesis 4. Effect of BG afliation on formal business startup's growth.
providing information and Indian economy, compiled by the
Model 1 Model 2 other business services Center for Monitoring the Indian
including market research, Economy
Business group afliate 9.65 product testing, and
(3.96) management consulting
Initial asset size 0.01 0.01
(2.36) (3.19)
Market development 32.66 40.75
(2.00) (2.68)
Industry dummies Included Included
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