Business Groups as Knowledge-Based Hierarchies of Firms

Gianmarco Ottaviano, Carlo Altomonte, Armando Rungi and Tommaso Sonno

No 16677, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 coexistence 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; Organization of production (search for similar items in EconPapers)
JEL-codes: D23 F23 G34 L23 L25 (search for similar items in EconPapers)
Date: 2021-10
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Related works:
Working Paper: Business groups as knowledge-based hierarchies of firms (2021)
Working Paper: Business groups as knowledge-based hierarchies of firms (2021)
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