What Determines the Scope of the Firm over Time?

A Focus on Institutional Relatedness

Author(s): Mike W. Peng, Seung-Hyun Lee, Denis Y. L. Wang
Source: The Academy of Management Review, Vol. 30, No. 3 (Jul., 2005), pp. 622-633
Published by: Academy of Management
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?
Academy o?Management Review
2005,Vol. 30,No. 3, 622-633.

WHATDETERMINESTHE SCOPE OF THEFIRM

OVER TIME? A FOCUS ON INSTITUTIONAL
RELATEDNESS
MIKE W. PENG
The Ohio State University

SEUNG-HYUN LEE
University of Texas at Dallas

DENIS Y. L.WANG
Chinese University of Hong Kong

"What determines the scope of the firm?" is one of the most fundamental questions in
We argue that in addition to product relatedness, a focus on
strategic management.
institutional relatedness?defined as an organization's informal linkages with dom
inant institutions that confer resources and
legitimacy?helps answer this question.
We address this question both longitudinally (firms in developed and emerging
economies over time) and cross-sectionally (developed versus emerging economies),
thus contributing to an institution-based theory of corporate diversification.

As part of the broader intellectual movement search, this article addresses the question
centered on new institutionalism throughout the "What determines the scope of the firm?"?one
social sciences in recent decades (North, 1990; of the four most fundamental questions in stra
Powell & DiMaggio, 1991; Scott, 1995; William tegic management identified by Rumelt, Schen
son, 2000), strategic approaches to organization del, and Teece (1994: 564).
are considering institutional forces much more Although scholars in the strategy field have
explicitly than before (Henisz, 2003; Oliver, 1997; pursued the scope of the firm question for three
Peng, 2003, 2006). Researchers increasingly real decades, clear answers have remained elusive.
ize that institutions are more than background Drawing on three streams of research, we argue
conditions and that "institutions directly deter that scope is driven by a combination of product
mine what arrows a firm has in its quiver as it and institutional relatedness. The first stream
struggles to formulate and implement strategy" highlights the importance of organizational in
(Ingram & Silverman, 2002: 20; emphasis added). tegration and disintegration over time (Law
Positioned to deepen our understanding of how rence & Lorsch, 1967). Although findings since
an institutional perspective adds to strategy re Rumelt (1974) generally suggest that, in devel
oped economies, unrelated product diversifica
tion (conglomeration) tends to destroy value,
This work wassupported in part by the Hong Kong Re
conglomeration has been found to add value
search Grants Council (Competitive Earmarked Research
Grant CUHK4148/03H), the National Science Foundation (CA during an earlier era (Davis, Diekmann, & Tins
REER Grant SES 0238820, formerly known as a Young Inves ley, 1994). Given that conclusions reached in dif
tigator Award), the OSU Center for International Business ferent studies may be influenced by their sam
and Graduate and the
Education and Research School,
ple period (Mayer & Whittington, 2003), a more
CUHK Faculty of Business Administration (Direct Grants
meaningful question seems to be "What deter
2070283, 207304, and 207204). The
expressed views are ours
and not those of our funding organizations. Earlier versions mines the scope of the firm over time?" (Lee,
were presented at the Academy of International Business Peng, & Lee, 2003). The second stream of re
(Phoenix, 2000) and the Academy of Management (Seattle, search posits that conglomeration may help
2003). Finally, we thank Trevor Buck, Nancy Ettlinger, Keun firms overcome institutional imperfections prev
Lee, Soo Hee Lee, Yongsun Paik, Agnes Peng, and Anne York
alent in emerging countries (Chang & Hong,
for their helpful discussions and comments, Dev Jennings
(action editor) and the three reviewers for editorial guidance, 2000; Guillen, 2000; Khanna & Palepu, 1997). The
and Yuanyuan Zhou for research assistance. third stream focuses on the changes in the rules

622
 2005 Pengf Lee, and Wang 623

of the game as economies develop (Hoskisson, 1970s were less developed. Thus, conglomerates
Eden, Lau, & Wright, 2000; North, 1990), putting a were perceived ex ante by external capital mar
great deal of emphasis not only on markets but kets to have an advantage in allocating capital.
also on institutional transitions that influence Over time, as external capital markets devel
corporate scope. It is argued that, during an oped, this conglomerate advantage likely be
early phase of transitions, a relationship-based came less important (Liebeskind, 2000).
strategy would be preferred (Peng & Heath, The value of product scope seems to be differ
1996), whereas a market-centered strategy ent in emerging economies, which are "low
would surface during a late phase of transitions income, rapid-growth countries using economic
characterized by more formal market-support liberalization as their primary engine of growth"
ing institutions (Peng, 2003). (Hoskisson et al., 2000: 249). The striking institu
Extending earlier work of Peng (2003)l that tional differences between emerging and devel
focuses on how institutional transitions affect oped economies have brought new institution
strategic choices in general, we probe how in alism to the center stage of strategy research on
stitutional transitions affect a
specific and im emerging economies (Peng, 2000, 2003; Wright,
portant form of corporate strategy: diversifica Filatotchev, Hoskisson, & Peng, 2005). Although
tion. We maintain that a firm's product scope Western media and advisors often suggest that
depends not only on its product relatedness but conglomerates destroy value and should be dis
also its institutional relatedness, which refers to mantled, recent evidence suggests otherwise.
the degree of informal embeddedness with the For instance, in Argentina, India, Indonesia, Is
dominant institutions in the environment that rael, Peru, South Africa, South Korea, and Tai
confer resources and legitimacy on the focal or wan, Chang and Hong (2000),Guillen (2000),
ganization. Since most existing work has dealt Khanna and Palepu (1999, 2000), Khanna and
with product relatedness, in the remainder of Rivkin (2001), and Lee et al. (2003) report that
this article we develop our argument focusing some (but not all) units affiliated with conglom
on institutional relatedness and its impact on erates enjoy higher profitability than indepen
the scope of the firm over time. dent firms. Therefore, it seems plausible to ask
whether the relatively positive link between
conglomeration and performance in emerging
DIVERSIFICATION RESEARCH INDEVELOPED
economies is a function of the level of institu
ANDEMERGING
ECONOMIES
tional (under)development, a perspective we de
Scope refers to the number of different eco velop next.
nomic activities (industries, segments, product
lines) a firm is engaged in (Jones & Hill, 1988). In
INSTITUTIONAL RELATEDNESS
developed economies, the value of product
scope seems to change over time. Up until the Although relatedness traditionally has been
1970s, a broad scope based on a large number of measured by product market characteristics
unrelated product markets was deemed valu (Rumelt, 1974), recent research suggests that
able (Palich, Cardinal, & Miller, 2000). However, market-based activities are significantly influ
the consensus since Rumelt (1974) seems to favor enced by nonmarket institutional factors (In
related diversification and to discredit unre gram & Silverman, 2002; Oliver, 1997; Peng, 2003,
lated diversification (Palich et al., 2000). This 2006). Extending this idea to diversification re
change has been documented by the dramatic search, a more encompassing notion, termed in
reversal in investor sentiment toward conglom stitutional relatedness, seems to make sense.2
eration?"positive in the 1960s, neutral in the Specifically, we define institutional relatedness
1970s, and negative in the 1980s" (Matsusaka, as the degree of informal embeddedness or in
1993: 358). Relative to a more recent era (since terconnectedness with dominant institutions.
the 1980s), external capital markets before the Such embeddedness confers resources and in

2
To thebest o? our knowledge, Ilinitchand Zeithaml (1995)
1 an
In early working paper, Shuhe Li (1999)discussed a first proposed the term institutional relatedness. However, it
series of issues related to rule- and relationship-based refers to product-based "institutional" relatedness and does
frameworks, which may be of interest to readers. not draw on the new institutionalism literature.
 624 Academy of Management Review July

creases the legitimacy of an organization powerfully fill the information needs of stake
(Granovetter, 1985; Oliver, 1997; Powell & Di holders in multiple industries (Khanna &
Maggio, 1991). A high degree of institutional re Palepu, 1997). However, as formal institutions
latedness means that there is a dense network develop, the reputation effect may be more lim
of ties with dominant institutions. ited to related products.
Institutional relatedness helps firms capital Social, political, and reputational capital are
ize on economies of scope based on three non critical for emerging economies (Moore & Jen
market forms of capital: social capital, political nings, 1995; Peng, 2003).3 Conglomerates in
capital, and reputational capital. First, social emerging economies typically develop and ex
capital is defined by Adler and Kwon as "the cel in their capability for repeated industry en
goodwill available to individuals or groups" tries, consisting of a bundle of skills to obtain
(2002: 23). Especially in emerging economies, the licenses from the state, arrange financing, se
uncertain environment results in a great deal of cure technology, and hire and train labor forces.
information asymmetry, leading to a potentially This generic, nonindustry-specific capability in
high level of opportunism when dealing with volves more than ties to government officials; it
unknown parties. Therefore, social capital em embodies an ability to leverage relationships
bedded in networks may become more impor with a variety of crucial institutions (e.g., finan
tant (Peng & Heath, 1996). This may be one of the cial institutions, labor forces). Moreover, this ca
reasons why closely networked conglomerates pability is difficult to trade, because it is embod
exist and perform better in emerging economies ied in an organization's knowledge, contacts,
(Khanna & Palepu, 1997). However, as formal and Therefore, such a capability
routines. "en
institutions develop, external monitoring mech courages those who possess it to diversify
anisms improve, and such nonmarket social re across industries rather than become specialists
lationships gradually may become less impor in one industry or product line" (Guillen, 2000:
tant (Peng, 2003, 2006). 365).
Second, political capital is geared toward in
creasing a firm's public reputation, social legit PRODUCT RELATEDNESS + INSTITUTIONAL
imacy, and political effectiveness when inter
RELATEDNESS
acting with political actors. In emerging
economies, political connections often affect How do product and institutional
relatedness
profitability (Au, Peng, & Wang, 2000; Fisman, combine to determine scope? Overall, it is im
2001; Peng & Luo, 2000). Since it is uncertain portant to recognize that firms have limited re
when and where opportunities from political sources and that resources are required to de
connections would come from, itmay be better velop any kind of relatedness?product,
for firms to cultivate continuous relationships institutional, or both. A value-adding strategy is
with governments. However, formal institutional to leverage appropriate resources to develop the
development, such as the creation of specialized kind of relatedness that is most conducive in
government agencies to deal with specific in creating value in a given institutional frame
dustries or domains (e.g., the U.S. International work. Both product and institutional relatedness
Trade Commission), would require firms to come become valuable over time as firms expand in
up with industry-specific political strategies scope, but then the value of this combined form
(Lenway & Rehbein, 1991), which may be better may change.
tailored to the business level (as opposed to the Take 1, depicting
Figure a snapshot of a par
corporate level). As a result, corporate-wide ticular period (i.e., the 1990s), as an example.
economies of scale in political activities may be Firms in Cells 1 and 2 can be found mostly in
difficult to attain when specialized formal insti developed economies where formal institutions
tutions develop (Shaffer & Hillman, 2000). are well developed. The difference between
Third, reputational capital may reduce infor
mation asymmetry between firms and stake 3
We are not arguing that institutional relatedness is not
holders such as consumers and employees
important in developed economies. For example, Oliver
(Shenkar & Yuchtman-Yaar, 1997). Because infor that institu
(1997) and Ingram and Silverman (2002) argue
mation search, especially in emerging econo tional relatedness is highly relevant for developed econo

mies, is costly, reputation can informally but mies.

2005 Peng, Lee, and Wang 625

FIGURE 1
The Importance of Product and Institutional Relatedness: A Snapshot of the 1990s

Institutional relatedness

Low High

Cell 1: Cell 3:
Product-unrelated Product-unrelated
Low and and institutionally
institutionally
unrelated diversifica related diversification
tion (Example: GE) (Example: Tata)

Product
relatedness

Cell 2: Cell 4:
Product-related and Product-related and
High institutionally unre institutionally related
lated diversification diversification
(Example: P&G) (Example: Honda)

Cells 1and 2 boils down towhether firms pursue and costs

that leads to the choice between strat
the efficient operation of an internal capital egies" (Jones & Hill, 1988: 160). Since the eco
market or the sharing of core competencies, re nomic benefits of the last unit of growth (e.g., the
spectively. Firms in Cells 3 and 4 exploit insti last acquisition) can be defined as marginal
tutional relatedness. Firms in Cell 3 are most economic benefits (MEB) and the additional bu
likely to be found in emerging economies, where reaucratic costs incurred as marginal bureau
institutional relatedness is important enough to cratic costs (MBC), the scope of the firm is deter
generate most profits and value added through mined by a comparison of MEB and MBC.
product relatedness may be relatively small. Graphically (Figure 2), according to Collis and
Firms in Cell 4 are most likely to be found in an Montgomery (1997)and Jonesand Hill (1988),the
economy where formal institutions are rela optimal scope is at point A, where the level of
tively well developed but informal institutions diversification is Dx. If the level of diversifica
are still influential (e.g., Japan). tion is D2, there are some economic benefits to
Firms in Cell 3, which would be empirically gain by moving up to Dx. Conversely, if a firm
classified as "unrelated" by traditional meth overdiversifies to D3, to Dx be
downscoping
ods, may actually enjoy a great deal of insti comes necessary.
tutional relatedness. Since institutional relat While this framework is insightful, an institu
edness is often less visible than product tional perspective adds that MEB and MBC are,
relatedness, firms' capability in leveraging in at least in part, determined by institutional re
stitutional relatedness thus becomes a more latedness (Kogut, Walker, & Anand, 2002; Wan &
difficult-to-imitate resource (Barney, 1991), Hoskisson, 2003). Consequently, we undertake a
hence necessitating strategic consideration of series of analyses next.
its importance.

A Longitudinal Analysis in Developed

ECONOMIC BENEFITS, BUREAUCRATIC Economies
COSTS, AND INSTITUTIONAL.RELATEDNESS
Taking the United States as an example, be
The existing literature suggests that diversifi tween the 1950s and 1970s the federal govern
cation strategy is essentially a function of eco ment, through a set of formal constraints, prob
nomic benefits and bureaucratic costs. Overall, ably inadvertently promoted conglomeration.
it is "the difference between relative benefits The post-1950 antitrust policies eliminated hori
626 Academy of Management Review July

FIGURE 2
What Determines the Scope of the Firm?

Costs/
benefits

Level of diversification

Adapted from Jones and Hill (1988: 166) and Collis and Montgomery (1997: 115). MEB: marginal
economic benefits; MBC: marginal bureaucratic cost.

zontal and vertical expansion?viewed as po A Cross-Sectional Analysis Between Emerging

tentially anticompetitive?as viablegrowth and Developed Economies
strategies. Thus, firms seeking growth were 4 shows, how con
forced to look beyond their primary Figure cross-sectionally,
industry. in economies add
glomerates emerging may
Graphically, in Figure 3, ifwe hold MBC con
value at ahigher level
of diversification,
stant (an assumption relaxed later), the MEB
whereas firms in developed
economies are not
curve shifted upward between 1950 and 1970.
able to. This analysis relies on two critical as
Consequently, the optimal scope expanded from
to D2. sumptions (to be relaxed later). The first is that
D1 >
MEBE MEBD. Underdeveloped formal institu
However, by the early 1980s, the formal con
tional frameworks in emerging economies sug
straints in favor of conglomeration changed
Horizontal were no gest this assumption.
Politically, instability
substantially. mergers
ad plagues many emerging economies (Henisz,
longer critically scrutinized by the Reagan
ministration. Academic research since Rumelt 2003). As a result, corporate political linkages,
which are beneficial for firms in developed
(1974) increasingly pointed out the rising MBC.
Innovations in takeover financing (e.g., junk
economies, may be more important in emerging
bonds) made more conglomerates potential ac economies (Peng & Luo, 2000). These conditions
Financial markets conse potentially lead to some conglomeration advan
quisition targets.
quently reacted negatively to conglomerates. In tage (Khanna & Palepu, 1997).
other words, the previous The second assumption is that, at a given
legitimacy-enhancing
informal norms in favor of conglomeration di level of diversifi?ation, MBCE < MBCD. This pri
minished (Davis et al., 1994). In some fashion, all marily draws on the informal aspects of the in
these factors shifted downward, moving D2 back stitutional frameworks. In emerging economies,
to a point near Dx (e.g., D3) by approximately because of the weaknesses of formal institu
1990 (Figure 3). tions, "informal constraints rise to play a larger
2005 Peng, Lee, and Wang 627

FIGURE 3
The Evolution of the Scope of theFirm in theUnited States: 1950-1970and 1970-1990
%
y MBCUS 1990

MBC US 1950and 1970

Costs/
benefits

MEB US 1970

Dl D3 D2

Level of diversification

role in regulating economic exchanges" (Peng & utives due to professional infights and family
Heath, 1996: 504; emphasis added). Although duels as organizational complexity grows,
managers all over the world cultivate consider and/or (3) the arrival of Western or Western
able interpersonal ties, managers in emerging trained managers. Therefore, firms need to
economies perhaps "rely more heavily on the downscope from point C (D2) to point B (D3), at an
cultivation of personal relationships to cope optimal level of diversification still higher than
with the exigencies of their situation" (Child, that for developed economies (i.e., D3 > Dj).
1994: 150). However, ifwe push the MBCE2 curve toMBCE3,
Overall, forany scope between Dx and D2 (e.g., then the scope should be drastically cut back
D3) in Figure 4, firms in developed economies at from point B (D3) to point D (D4).
point C need to be downscoped toward point A Similarly, in Figure 5b, we can relax the other
(Dj), whereas there is still room for firms to gain assumption by shifting MEBE1 toward MEBE2.
in emerging economies at point D, which can This may be due to improved formal institutions.
move up to point B (D2). Therefore, ifMBCE1 remains the same, the opti
mal level of diversification is reduced from point
C (D2) to point E (D5). Ifwe use MBCE2 or MBCE3
A Longitudinal Analysis in Emerging
discussed above, then the optimal level be
Economies
comes point F (D6) or point G (D7), respectively.
Figure 5 shows longitudinally how firms in Note that at point F (D6), conglomerates in
emerging economies may derive or lose net ben emerging economies can still add value,
efits at a high level of diversification over time. whereas at point G (D7) they cannot.
First, in Figure 5a we shift MBCE1 up to MBCE2
(for simplicity, MEBE1 remains the same; itwill
in The increase in MBC
PROPOSITIONS
change Figure 5b). may
be because of (1) "overdiversification" beyond The analyses above suggest several proposi
the optimal point C due to agency motives and tions about the changing scope of the firm over
abuses, (2) the lack of cohesion among top exec time. Overall, it seems that "no organization can
 628 Academy of Management Review July

FIGURE 4
The Optimal Scope of the Firm: Developed versus Emerging Economies at the Same Time

MBCe

Costs/
benefits

Level of diversification

Subscripts D and E attached to MEB and MBC curves stand for developed and emerging economies, respec
tively. In developed economies the optimal point of diversification is still point A at D^ as in Figure 2.

be properly understood apart from its wider so ments in capital markets in developed econo
cial and cultural context" (Scott, 1995: 151). By mies lies in analyzing changes in institutional
extension, we believe that no answer to the frameworks governing the relative costs and
scope of the firm question is complete without benefits of external versus internal capital mar
an appreciation of institutional relatedness. kets. Capital market development may nullify
Above a certain threshold level (primarily for the need for informal institutional ties to do
risk reduction purposes; see Palich et al., 2000), business, because more efficient external capi
conglomeration cannot be argued to be either tal markets may reduce the costs of formal con
uniformly beneficial or uniformly costly without tractual relationships between firms and exter
a specification of the institutional contingencies nal financiers. In other words, external capital
(Liebeskind, 2000). This argument, therefore, markets and conglomeration (with internal cap
contrasts with the one-sided arguments solely ital markets) may be substitutes for each other
derived from the rece?? Western experience, (Liebeskind, 2000).
which discredit conglomeration. Our most fun
Proposition 2: The higher the level of
damental proposition is as follows.
financial market development, the
Proposition 1: The higher the institu narrower the scope of the firm.
tional relatedness (number and
Second, nonfinancial formal institutions, such
strength of informal ties with domi
as regulatory frameworks and competition poli
nant institutions), the greater the
cies, may also have a bearing on diversification
scope of the firm.
strategies. According to the resource-based
We consider two factors that have significant view, if conglomerates' advantage is to be sus
effects on institutional relatedness. One of the tained, it is imperative that certain limits to
most significant formal institutional frame competition (e.g., government-imposed entry
works is formal financial institutions (North, barriers) exist (Guillen, 2000). Once governments
1990). One way to explain the changing senti start the process of privatization, liberalization,
2005 Peng, Lee, and Wang 629

FIGURE 5
The Evolution of the Scope of the Firm in Emerging Economies
(a) Increase in Bureaucratic Costs

MBCFoa

Costs/
benefits

D4 D, D3 D2
Level of diversification

(b) Decrease in Economic Benefits

/ MBCE3

MBC El

Costs/
benefits

D7 ?! D6 D5 D2
Level of diversification

Subscripts D and E attached to MEB and MBC curves stand for developed and emerging
economies, respectively. In developed economies the optimal point of diversification is still
point A at D1# as in Figure 2.
 630 Academy of Management Review July

and globalization, the relative importance of in business opportunities in the economy" (Khanna
stitutional relatedness may decline, whereas & Palepu, 1999: 279; emphasis added).
the relative importance of product relatedness
Proposition 5: In the short run, the im
rises. Such in developed
evolution and emerg
portance of institutional relatedness is
ing economies has been documented by Guillen
likely to increase, and the scope of the
(2000) and Toulan (2002), drawing on samples of
firm is likely to increase.
conglomerates in Spain and Argentina, respec
tively. At first glance,Proposition 5 seems to be at
odds with Propositions 1 through 4 and, more
Proposition 3: The better developed with the recent trend toward lib
broadly, global
the formal market-supporting institu eralization and privatization. We invoke three
tions, the narrower the scope of the to make our case. First, new institu
arguments
firm. tionalism suggests that history matters and that
the short run is closer to history than the long
Institutions are not static, nor are strategies.
run (North, 1990). Ingram and Silverman com
How, then, do they evolve over time, especially
plain that "strategy often suffers from a tyranny
in emerging economies? In emerging economies
of the here and now, a desire to celebrate con
formal, market-supporting institutions may
some of the functions cur temporary phenomena and slight historical
eventually pick up ones" in the long run there
(2002: 6). Although
rently performed by conglomerates, thus reduc
perhaps may be a convergence, the historically
ing the value of institutional relatedness (Lee et
derived emphasis on institutional relatedness
al., 2003). The development of market-supporting
in emerging economies is likely to continue to
institutions is also likely to facilitate the widen
matter, at least in the short run.
ing of alliance relationships, because unfamil
because exist in and
Second, organizations
iar parties, who would have been deterred from
through time, it is possible that no theory or
entering into relationships before, are now con
construct is truly "holochronic"?that is, a rela
fident enough to collaborate in order to capture
tionship exists independent of time (Zaheer, Al
the gains frommore complex exchanges (Peng,
bert, & Zaheer, 1999: 734). Although the construct
2003). Alliances with other firms may gradually
of institutional relatedness may be nonholo
become a less costly way of doing business,
chronic, so, too, are virtually all our theories and
compared to internalizing many transactions as
constructs. This characteristic alone does not
before.
preclude this new construct frommaking a con
tribution. To make further a
Proposition 4: In the long run, the im progress, necessary

of institutional relatedness is first step is "to make explicit the time scales
portance
...
likely to decline, and the optimal implicit in existing work by a full specifica
scope of the firm is likely to contract.
tion of all relevant time scales" (Zaheer et al.,
1999: 739). Specifically, we have followed Peng s
However, "How long is the long run?" remains (2003) "temporal bracketing" approach by limit
debatable. Because chaos and setback may pre ing our predictions for either the long run or the
vail, in the short run, Proposition 4 may not hold. short run. Although such an approach may re
Although the general direction throughout duce the generalizability across time (both long
emerging economies is to introduce more formal run and short run), it "increases the precision of
market-supporting institutions, their develop the predictions, at least within the specified pe
ment is almost certain to be uneven (Peng, 2003). riod" (Peng, 2003: 17). This way of theorizing is in
Certain sectors are likely to be deregulated contrast with much existing strategy research,
while others remain state controlled. In these which "downplays temporal transitivity" (In
half-reformed economies, conglomerates, by le gram & Silverman, 2002: 6), but itmay be more

veraging their institutional relatedness, may temporally informed and valid (Mayer & Whit
emerge as intermediaries that connect the tington, 2003; Zaheer et al., 1999).
opened and closed sectors (Guillen, 2000). Dur Finally, a better specification of what short
ing the transitions, at least in the short run, such run is helps make our case. Williamson (2000:
intermediation capabilities "are likely to be 597) suggests an interesting classification: (1)
come more, not less, valuable for exploiting new 100-1000 years, (2) 10-100 years, (3) 1-10 years,
 2005 Peng, Lee, and Wang 631

and (4) continuous (now).Williamson (2000:608) 2000). The conglomerate in many emerging
argues that new institutionalism is primarily economies tends to have blurred boundaries
concerned with the second and third periods. If (Peng & Heath, 1996). Such a firm is sometimes
these two periods (1-100 years) are reasonable called a "business group." The
difficulty in
proxies of the short run, they seem to be a win identifying not
its boundaries has
only led to
dow of opportunity during which Proposition 5 nontrivial measurement problems but also to
may find some empirical support. debates on whether such an organi
conceptual
Globally, three sets of preliminary evidence zation is a "firm." Thus, future work needs to
broadly support the somewhat counterintuitive tackle this challenging problem.
Proposition 5. First, throughout emerging econ Second, while researchers have experienced
omies, many e difficulties in measuring
conglomerates spearheaded great product related
commerce ventures
and consequently expanded ness, institutional relatedness,
measuring
their scope in the 1990s. Second, conglomerates which is more informal, unique, and invisible, is
in China and Russia for the For exam
recently emerged likely to be much more challenging.
first time, thus pointing to the increasing (not in Chile, Khanna and relied on "mis
ple, Palepu
decreasing) importance of institutional related cellaneous knowledgeable observers" (2000: 273)
ness, at least in the short run (Peng, 2000). Fi to identify group linkages. In Indonesia, Fisman
nally, in Chile and India, the scope of conglom (2001) used an idiosyncratic "Suharto Depen
erates actually increased during a period of
dency Index" to measure firms1 connectedness
rapid liberalization (Khanna & Palepu, 1999). with former president Suharto. These measures
inevitably carry some "noise." How to empiri
an inherently invisible and so
DISCUSSION AND CONCLUSION cally capture
cially complex resource such as institutional re
In this article we have focused on one of the latedness remains a significant challenge.
four most fundamental questions in strategic for conglomerates in emerging econo
Third,
management. The article contributes to our un the needs to contract
mies, given long-run (Prop
derstanding of the scope of the firm question by ositions to ex
1-4) and the short-run incentives
highlighting the importance of institutional re
pand the scope (Proposition 5), where the point
latedness in an institution-based theory of cor of inflection is remains to be clarified (Peng,
porate diversification. Earlier, Peng (2003) artic and technological
2003). Further, geographical
ulated how institutional transitions matter for
scope (Delios & Beamish, 1999; Peng, 2006;
strategic choices in general; we have extended
Wright et al., 2005), while beyond the scope of
this work by specifying under what specific in
this article, warrants further investigation.
stitutional conditions a conglomeration strategy Overall, the question "What determines the
may or may not add value. Since "we need the of the firm over time?" entails
scope complex
that come
frame-breaking experiences only answers. We have attempted to capture some of
from examining and comprehending organiza this complexity by advancing and leveraging
tions operating in other places and other times"
the notion of institutional relatedness. In conclu
(Scott, 1995: 151), we have integrated research
sion, if this article could contain only one mes
not only from developed economies but also
sage, we would like it to be a sense of the stag
from emerging economies. Given the typical
on gering power of institutional frameworks and
one-sided emphasis product relatedness
their transitions that help determine the strate
(which, of course, is still important) in the liter
gic choices and performance outcomes for cor
ature, it seems imperative that much more re
porate diversification over time.
search investigate the important but often
missed role of institutional relatedness in driv
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Mike W. Peng is an associate professor of management at the Fisher College of

Business, The Ohio State University. In autumn 2005 he will become the first Provost's
Distinguished Professor of Global Strategy at the University of Texas at Dallas. He
received his Ph.D. from the University ofWashington. His current research focuses on
business strategies in emerging economies.

Seung-Hyun Lee is an assistant professor of international business at the University

of Texas at Dallas. He received his Ph.D. from the The Ohio State His
University.
current research focuses on institutional change and its implications for firm perfor
mance.

Denis Y. L. Wang is an associate professor of management at the Chinese University

of Hong Kong and Inaugural HSBC Visiting Chair Professor of International Business
at the University of British Columbia. He received his M.B.A. from York University. His
current research interests are strategies and investments in emerging economies,
with a focus on China.