Understanding Business Group Performance in an Emerging Economy: Acquiring Resources and Capabilities in Order to Prosper*

ABSTRACT The prevalent organizational form in most emerging markets is business groups. These groups have typically been viewed through a transaction cost economics perspective where they are perceived as responses to inefficiencies in the market. However, the evidence to date on what generates a positive business group‐performance relationship in such environments is not well understood. This study expands the understanding of business groups by employing the resource‐based and institutional theoretical perspectives to examine how groups acquire resources and capabilities to prosper. The empirical evidence is based on over 224 business groups in the emerging economy context of China and shows that most of the endowed government resources do not help business groups to create a competitive edge. Instead, those business groups with strategic actions to develop a unique portfolio of market‐oriented resources and capabilities are most likely to prosper. The results provide critical insights on the relationship between the initiation of institutional transformation and the desired outcome to be realized by organizational transformation, thus enriching our understanding of institutions and strategic choices facilitated or constrained by organizational resources in emerging economies.