Sources of Business Unit Performance Heterogeneity in India: The Influence of Ownership

Abstract

Executive Summary This article examines the differential impact of ownership on the relative importance of corporate headquarters, industry, and business units on the performance of business units of firms in India. Different sets of owners have diverse objectives due to which there are variations in strategic choices resulting in the variance in performance of firms. This article first examines the extent to which variance in business unit performance can be attributed to ownership. It subsequently evaluates the relative importance of industry, corporate headquarters, and business units in explaining business unit performance variance of domestic firms and MNEs. The analysis for this article is based on a unique hand-collated database that contains details of the business units of domestic firms and MNEs operating in India. These details include business unit performance as well as the industry affiliation of the business unit. The article leverages multilevel analysis to understand the relative importance of the various effects. This analysis helps to know the magnitude of the various effects as well as their statistical significance. The results indicate that ownership is a significant institutional variable that explains business unit performance. An examination of the magnitudes of the effects also suggest that business unit effects and corporate effects are more important than industry effects in explaining business unit performance of firms operating in India. The magnitude of the business unit effects is greater than the corporate effects in the case of domestic firms. In the case of the MNE affiliates, although the magnitude of the corporate effects are greater than the business unit effects, this difference is not statistically significant. Overall, these results reinforce other empirical results that establish the importance of firm resources and capabilities in influencing firm performance as compared to the industry structure. These results are significant because in the Indian context, although studies have so far evaluated firm performance, they have not disaggregated the business unit and corporate headquarters effects. This article aligns the study of performance variance of Indian firms with those conducted across the globe and helps to compare how the relative importance of various effects vary. It makes an important contribution by including ownership in the study of business unit performance variance of Indian firms.