Business Groups Exist in Developed Markets Also: Britain Since 1850

Diversified business groups are well-known phenomena in emerging markets, both today and historically. This is often explained by the prevalence of institutional voids or the nature of government-business relations. It is typically assumed that such groups were much less common in developed economies and largely disappeared during the twentieth century. This working paper contests this assumption with evidence from Britain between 1850 and the present day. During the nineteenth century, merchant houses established business groups with diversified portfolio and pyramidal structures overseas, primarily in developing countries, both colonial and independent. In the domestic economy, large single product firms became the norm, which over time merged into large combines with significant market power. This reflected a business system in which a close relationship between finance and industry was discouraged, but where there were few restrictions on the transfer of corporate ownership. Yet large diversified business groups did emerge, which had private or closely held shareholding and substantial international businesses. This working paper argues that diversified business groups added value in mature markets such as Britain. In the domestic economy, Pearson and Virgin created well-managed and performing businesses over long periods. The much-criticized conglomerates of the 1970s–1990s era such as Hanson and BTR were also quite financially successful forms of business enterprise. The demise of many of them appears to owe at least as much to management fads as to serious financial underperformance.