According to Khanna and Palepu, India is an emerging economy where poor functioning of institutions leads to severe agency and information problems. This has led to the formation of business groups in these markets. This affiliation of firms to business groups can lead to benefits as well as value destruction. This paper compares the profitability of firms affiliated to a business group with stand-alone firms in the automobile sector of the Indian business environment. Comparison has been made on different dimensions of firm performance such as firm profitability, shareholder value and growth. The paper concludes that in the automobile sector, a firm's affiliation to a business group does have a significant effect and helps in increasing the performance of the firm.

It is a common belief that companies which are owned by the big corporate houses dominate the private sector of the industry in which they operate. This is a common perception not only in India but also in other emerging economies like Brazil, Russia and China. Vigorous academic disclosure about this organizational form is continuously ongoing, with several scholars offering a range of reasons for the existence of business groups. A growing body of work, set in emerging markets, shows that group affiliation has a robustly large and often beneficial effect on the financial performance of member firms (Khanna and Palepu, 2000).

Business groups possess advantages in product markets through their access to group reputations, established relationships with clients, and other affiliated firms. These advantages may enable group-affiliated firms to serve a broader set of industry segments. In addition, business groups are likely to have trade ties or affiliates in foreign markets who can share the knowledge of these markets, thereby lowering the barriers for the entry of group affiliates. Since group-affiliated firms are likely to have ties with foreign markets, they may have a higher export orientation. Conversely, the benefits of group membership could be somewhat confined to the domestic market, suggesting that group-affiliated firms will have a lower export orientation.

This paper intends to study the role of group affiliations of firms when compared to stand-alone firms. It checks whether the firms that are affiliated to a business group have robustly large and beneficial effects on the financial performance of the member firms. The financial and strategic management aspects of the business groups and stand-alone companies have been analyzed from several angles.

Management Research Journal, Stand-Alone Firms, Cross-Sectional Study, Business Groups, Foreign Markets, East Asian Economies, Ordinary Least Squares, OLS, Return on Assets, ROA, Strategic Management, Corporate Diversification Strategy, Indian Firms, Indian Business Groups, Automobile Sectors.