The competitive advantage of affiliation with business groups in the political environment: Evidence from the Arab Spring

Abstract

Under weak market institutions, the positive association between group affiliation and firm performance has been empirically supported. However, the mechanisms behind this relationship remain unclear as business groups may create value for their affiliates via market and non-market strategies. We advance this discussion by leveraging an exogenous shock, namely the sudden government changes ignited by the Arab Spring, to examine: (a) whether business groups hold a competitive advantage in the political environment that enhances the performance of their affiliates and (b) which type of business groups provide that advantage to their affiliates. Our results suggest that the positive effect of group affiliation on performance is not only driven by groups’ capabilities to earn superior rents in the market environment as alluded in the literature, but also by their capabilities to earn greater influence rents compared to standalone firms in the political environment. This performance effect is stronger for affiliates of family than for non-family business groups, suggesting that political influence capabilities are heterogeneusly distributed across business group types.