The side effect of business group membership: How do business group isomorphic pressures affect organizational innovation in affiliated firms?

Literature suggests that business groups help affiliated firms overcome market failure, which is common in emerging economies, thus serving as a source of competitive advantage. This paper discusses how and when affiliated firms pay for these advantages. Specifically, we propose that affiliated firms, compared with stand-alone firms, bear unique institutional isomorphic pressures from business groups. Using information technology industry samples from the World Bank’s Enterprise Surveys, we find that affiliated firms underperform on organizational innovation more than stand-alone firms. In addition, we find that the main effect is strengthened when the business group size is large and the affiliated firm CEO’s industrial experience level is low. Moreover, the main effect is the strongest when an affiliated firm is embedded into a large business group the CEO of which has a low industrial experience level. Our findings contribute to a comprehensive understanding of the impact of business group membership.