Market Competition, Plan Constraints, and the Hybrid Business Groups : Explaining the Business Groups in China

Abstract

An increasing number of Chinese companies are now taking

the form of the business group. The big business groups in

China tend to have more state shares, be more heavily indebted,

less profitable, and accumulating capital more slowly than

non-group firms. The emergence of the business groups was an

outcome of entry into new profitable business fields by the

existing companies given that exit from the old business fields

was not easy due to institutional constraints. In this case, entry

or expansion into new business fields was often accompanied by

asset diversion from old to new business fields conducted by

new spin-off firms, leading to the creation of hybrid parent

companies. The net effect of this kind of asset diversion is

dubious because it was associated with asset striping and/or

information hiding from the supervisory state agency. These

hybrid form business groups are characterized by low long-term

investment ratio and low weight of business income of the

parent companies.