The origins of business groups in China: An empirical testing of the three paths and the three theories

The available empirical literature tends to focus on the performance comparison between business groups (BGs) and non-business groups, and there is no study that quantitatively verifies the origins of the business groups, particularly in China. This paper uses the survey data of SOEs (state-owned enterprises) in China to verify the three paths toward business groups, such as M&As (merger and acquisitions), spin-offs and joint ventures. This study discusses three alternative theories to explain the emergence of the business groups in China. These are the market-based view, the state-activism view and the resource-based view. This paper found that the greater autonomy given after changing into a shareholding corporation is one of the most consistent and significant factors leading to the business group, regardless of the paths. First, this implies that SOEs have gone from traditional SOEs, to shareholding corporations, and then finally to business groups. Second, it finds that there are certain differences among the three paths toward the business group. The degree of market competition and control by the city-level government are the significant variables in the path via M&A, toward the business group. This is consistent with the state activism view. The significant variables for the spin-off path are the low leverages and the connection with the state. This is consistent with the resource-based view. The JV (joint venture) path seems to be consistent with the market-based and resource-based view, with the significant variables of private/foreign owner-controller, high investment activity, low leverage and size.