Membership in a business-group may affect a firm’s performance. Using the data of Indonesian manufacturing industry in 1996 and 2006, I find that being a member of a business group positively affected firms’ performance. It appears, however, that the business-group membership premium came from providing better access to the market, rather than by having a differential effect on production activities. In particular, being a member of a business group increased the firms’ earnings by 21 percent and labor productivity by 11 percent. Business-group memberships evidently brought firms better access to the markets for imported inputs and highly educated labor, and, to some extent, the export-product market. The effects of business-group membership on firms’ production activities were more ambiguous: relative to the standalone firms, the affiliated firms spent more on wages, less on materials, and generally the same amount of investment. This finding provides more evidence to explain why firms in developing economies tend to become members of business group, rather than lone rangers.
Rizal Shidiq is Assistant Professor Economics and Modern Southeast Asia at the Leiden University Institute for Area Studies (LIAS).
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