You Are Managing a Firm in a Developing Economy

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The Answer is Conglomerates in emerging economies may add value at a higher level of diversification, where firms in developed economies are not able to. This analysis relies on two crucial and reasonable assumptions. The first is that at a given level of diversification, MEB_EmergingEcon > MEB_{DevelopedEcon}. This is primarily because underdeveloped external capital markets in emerging economies make conglomerates as internal capital markets more attractive A second assumption is that at a given level of diversification, MBC_EmergingEcon < MBC_{DevelopedEcon}. In emerging economies, because of the weaknesses of formal institutions, informal constraints rise to play a larger role in regulating economic exchanges. Most conglomerates in these countries are family firms, whose managers rely more on informal personal (and often family) relationships to get things done. Relative to firms in developed economies, firms in emerging economies typically feature a lower level of bureaucratization, formalization, and professionalization, which may result in lower bureaucratic costs. Consequently, for any scope between D₁ and D₂, firms in developed economies need to be downscoped toward D₁, whereas there is still room to gain for firms in emerging economies to move up to D₂.

You Are Managing a Firm in a Developing Economy

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