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Business groups as knowledge-based hierarchies of firms

Carlo Altomonte, Gianmarco Ottaviano, Armando Rungi and Tommaso Sonno

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: Hierarchical differentiation is a cornerstone of the organizing process. In this paper, we do three things. First, exploiting a newly assembled dataset, we provide the first worldwide overview of the patterns of hierarchical differentiation across Business Groups (BGs), highlighting the co-existence of different hierarchical shapes. Second, we show how the different shapes can arise as optimal hierarchical structures in a knowledge-based model of BGs when subsidiaries' operations involve ubiquitous problem solving under parents' supervision. Three primitive characteristics of a BG determine its optimal choice of hierarchical structure: production efficiency and two dimensions of problem solving efficiency related to supervising knowledge creation and handling associated communication across subsidiaries. Third, we check the consistency of the model's predictions with the empirical patterns for Europe, the US, and the world. The model successfully passes the consistency test.

Keywords: business groups; knowledge hierarchies; multinational enterprises; organisation of production (search for similar items in EconPapers)
Date: 2021-10-15
New Economics Papers: this item is included in nep-knm
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Business Groups as Knowledge-Based Hierarchies of Firms (2021) Downloads
Working Paper: Business groups as knowledge-based hierarchies of firms (2021) Downloads
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