Diversified business groups and corporate restructuring in China

Abstract

Purpose

This paper aims to explore the roles different ownership structures, the joint effect of related and unrelated diversification strategies, and previous performance levels have on the restructuring strategies of such firms.

Design/methodology/approach

Annual reports of publicly traded firms in the two Chinese stock exchanges are used to collect data. Multiple regression and ANOVA analysis are used to examine the impact of ownership structure types, match between diversification strategies, and previous performance on the change of business scopes of the sample business groups.

Findings

Compared to other ownership types, government owned business groups tend to increase their business scope during asset restructuring, while private business groups tend to decrease their scopes through divestitures and spinoffs. Poor previous performance is also found to be negatively related to change in business scopes. The “match” between related and unrelated diversification strategies of the business groups leads to increase in business scopes, while “mismatch” between these two strategies tends to lead to decrease in business scopes.

Practical implications

This study provides some recommendations to managers and public policy makers in emerging economies. There is a need to monitor the changing institutional environment a firm operates in. It is up to the managers of business groups to determine the degree of market imperfections they are facing and the need to compensate with internal market mechanism and social exchange mechanism within the group structure. As China opens its door further to private ownership and foreign ownership, the pressure to increase efficiency and effectiveness along with the continuous improvement of the institutional environment will require that managers adopt strategies that can enhance the competitiveness of the firms, whether it is through further diversification or scope reduction.

Originality/value

This research deepens our understanding of restructuring strategies of Chinese business groups, by linking factors such as ownership structure, diversification strategies, and past performance to scope changes in these groups. It can broaden our understanding of corporate restructuring in transitional economies, such as China and India.

Citation

Zhao, J. (2009), "Diversified business groups and corporate restructuring in China", Management Research News, Vol. 32 No. 9, pp. 874-887. https://doi.org/10.1108/01409170910980371