Coordinated location decisions in business groups and the boundary of the firm

Abstract

Business groups are important organizations with often a complex web of ownership ties linking uniquely registered firms together. This paper investigates how investment decisions may be correlated in business groups as a function of these ownership linkages. As information and management decisions may be transferred across firms, actions may be coordinated across subsidiaries. This paper investigates how proximity in the ownership network and the type of ownership (such as majority holding, minority stake or financial investment) between two firms may affect the likelihood of investing in the same country. Combining data from FdiMarkets and Orbis, we focus on investment projects into fourteen Eastern European countries including Poland, Romania and Turkey. We estimated a location choice model extended with variables capturing the strength of the relationship between two firms in a business group. We found that having related firms with experience increased investment probability substantially - about half the impact compared to having past project by the investor itself. When two firms are closer within an ownership network, their decisions were found to be more correlated, too.