Measuring Institutional Relatedness

Abstract

Firms in most emerging economies are engaged in seemingly un-related activities. This is particularly observed in the case of business groups which dominate the landscape of these economies. Initially, diversification in emerging economies that was not based on product or technological considerations was considered value reducing. However, according to the new emerging consensus unrelated diversification is a strategic response to the institutional voids that exist in such economies. Despite major breakthroughs in conceptualizing this institutional relatedness, the empirical support for this concept has come only through case studies and hence is not generalizable. Creating an appropriate measure of institutional relatedness is a challenge because it has to take into account the .unique and invisible. nature of institutional relatedness. An appropriate measure should capture the myriad reasons used by firms to combine various businesses in emerging economies as a response to various institutional voids, without giving undue importance to any specific rationale. Besides, the measure should not be a fixed value; it should be allowed to change to help gauge the impact of institutional transitions on relatedness. Finally, it should provide for the uniqueness of each firm when it ventures into areas not tried by other firms. In this paper we purport to address this lacuna in research by proposing an empirically implementable measure for institutional relatedness having the features described above. We also show that the empirical estimates for India of our measure of relatedness are in consonance with the tendencies observed by studies using the case-study method and seem to be linked with the institutional transitions that have been observed in recent years.