Last week I read an interesting paper about business groups. Business groups, or conglomerates, are firms that have divisions operating in very different sectors of economic activity. For example, General Electric in the U.S. operates in several sectors, such as machine manufacturing, finance, and also electric power generation, transmission, and distribution. In Portugal, the most prominent example is Sonae, with businesses in retail, telecommunications, and wood product manufacturing.
The paper uses Canadian data to document some stylized facts about business group activity. The most salient one is that business group divisions are larger (e.g. supermarkets owned by Sonae tend to be large compared to local supermarkets, say) , and also more productive. This is interesting because many people complain that business groups are too large and inefficient, whereas the evidence seems to point in the opposite direction.
The next question is of course to understand why business groups form, leading them to be composed of large and highly productive divisions. One possible explanation, explored here, is that business groups emerge to form an internal capital market. That is, in countries where financial markets do not function properly, business groups emerge in order to facilitate the funding of new businesses, and the cross-division allocation of capital.
I would say the Portuguese experience appears to provide support for this theory of business group formation. Around 50 years ago, the Portuguese economy was dominated by large and far-reaching business conglomerates. Although business groups are still important today (e.g. Sonae), my guess is that they were far more important during the 1960s. A sign that financial markets are more efficient today than they were in the past.