Agglomeration, Technology and Business Groups

Citation

Roig Dobon, S. (2009), "Agglomeration, Technology and Business Groups", Management Decision, Vol. 47 No. 6, pp. 1022-1025. https://doi.org/10.1108/00251740910966712

The book Agglomeration, Technology and Business Groups sets out to describe the evolution of the way in which firms have expanded over the past decade and analyse the effects on local production systems of ownership or control by just a small number of leading firms. As the title suggests, the six chapters that comprise the book, accompanied by their detailed appendices, cover topics ranging from the interpretation of the term business group and their relation with spatial agglomeration and technology, as well as how the focus on these aspects has helped to shape firm strategy. This publication is the result of a long‐term interest in Italian industrial districts which the authors believe can be applied to many other instances and areas where business groups have become a common phenomenon.

Giulio Cainelli, who is a Professor of Economics at the University of Bari, and his co‐author, Donato Iacobucci, a Professor of Applied Economics at Polytechnic University delle Marche in Ancona, have spent well over a decade researching the phenomenon of business groups and their particularities. Works such as “Externalities and long‐term local industrial development” (Cainelli and Leoncini, 1999) or “Growth, diversification and business group formation in entrepreneurial firms” (Iacobucci and Rosa, 2005) are evidence of their expertise and specialist background. This work provides readers who should vary from academics from a variety of disciplines to policy makers and practitioners with different insights on the evolution of the business group as a driving force in the economy of many developed and developing countries.

From the outset, Guilio Cainelli and Donato Iacobucci present some original and interesting ideas on definitions both of the term “business groups” itself and even on the definition of what constitutes a firm. The authors argue that “the business group, rather than the single legal unit, is the most appropriate ‘unit’ to analyse the organisation and behaviour of firms” (p. 1). There is evidence to back up the authors' view that business groups are often favoured by entrepreneurs as a means of expansion whilst maintaining control over their varying business interests. Rather than risking having all their assets under one legal roof, it is logical and desirable in a changing and uncertain economic climate to keep these interests legally separate, thus safeguarding other businesses that are not under threat and endowing units with the degree of autonomy demanded by today's market. Unlike the majority of the existing literature on business groups, whose main concern is that of the reason for their existence and the advantages for the major stakeholders, Cainelli and Iacobucci propose a study of the influence of structural variables such as spatial agglomeration and technology on strategy and organisational form.

The analyses contained in the book deal mainly with two hypotheses: one based on the premise that the business group is a firm organisational form, and the other concerned with organisational specificity in terms of geographical location within industrial districts and innovative organisational forms (Mella, 2006). Analyses also focus on manufacturing sectors due to the fact that the large majority of literature on this topic is based on manufacturing, as well as the heterogeneous nature of the service sector in terms of the influence of agglomeration and technology (Altinay, 2005; Lim et al., 2008, Shaw et al., 2008). As manufacturing slips further from the hands of European countries and know‐how too starts to find its way to primarily Asian counterparts, this may be an area that will require a fair amount of attention in the future if academic literature is to reflect the realities of modern economies. The introduction ties together the idea of business groups and industrial districts and lays down some thought‐provoking discussion in its references to industrial clusters and the advantages of agglomeration such as knowledge spillover, product innovation and growth.

The second chapter reveals pertinent insights on the main streams of literature that have grown up around the subject of business groups and, to a large extent, the authors' own views on a definition and the reasons for their existence. The fundamental belief that underpins the theory and empirical analysis in this book is that “the business group, rather than the firm (or legal unit), is the most appropriate nit to use in analysing the organisation and behaviour of firms” (p. 9). Here the work of Chandler (1962) and that of Williamson (1970) are key studies that underpin many of the reasons for the academic posture and treatment concerning business groups over the past 30 years. It is clear that Cainelli and Iacobucci stray widely from the path laid down by these two authors in the sense that Williamson clearly positions himself as a champion of the M‐form as opposed to the holding firm that generally characterises business groups. Despite this not being the main aim of the book, this chapter raises some important questions about past assumptions and theories while presenting sound criteria as a basis for their conception of the business group, which has more to do with ownership ties than other forms of stable relationship – a criterion that is arguably more objective and quantifiable than non‐ownership ties. Here, the focus on strategic choices such as location or diversification makes business groups an ideal unit of analysis. When considering business groups as an organisational form of the firm, these authors question the idea that business groups are peculiar to developing and continental European countries and suggest that they have become a common response in both developing and developed countries to modern‐day market conditions and technology, particularly with regard to small and medium‐sized firms.

The book then goes on to deal specifically with issues surrounding the effects of agglomeration on organisational form and, in this case, the tendency towards business groups in industrial districts. After an extensive review of the existing literature on spatial agglomeration, highlighting the advantages commonly cited for agglomerative economies such as increased specialisation or differentiation in the production structure, the authors then go on to apply this extensive review to the particular case of Italian business districts and propose various hypotheses, namely that the presence of business groups is higher in industrial districts than in non‐agglomerated areas, and the relationship between spatial agglomeration and the organisational structure of firms. The empirical analysis focuses on the presence of what these authors call “local labour systems” as a label for business groups found in industrial districts. The analysis is then based on the various industry sectors such as food, textiles, mechanics, etc., as well as a regional approach. Some surprising and interesting results occur, which underline the importance of considering both the influence of agglomeration forces alongside the influence of technology, which is explored in depth in chapter 4. The empirical study and comparison of industrial/non‐industrial districts appears to confirm that “the agglomerative forces operating in industrial districts seem to foster the formation of business groups within these production systems” (p. 46). The conclusion here is that firms are moving towards a more hierarchical, concentrated structure. The lower costs incurred by business groups in districts that are industry‐specific due to the availability of information in production structures means that new units can be set up or existing ones acquired more easily. Interestingly, these authors conclude that spatial agglomeration affects the growth or specialisation of business groups around the district core business rather than fostering spatial concentration.

In terms of technology, the effects are once more analysed from the perspective of a pyramidal organisation where decisions are taken by the unit at the top of the pyramid with regard to the firm's business activities. These authors propose that business groups are more widespread in science‐based industries where knowledge is easily transferred to other sectors and that the degree of diversification is higher in science‐based groups than in other types. They also address the relationship between technology and vertical integration, and suggest that the business group organisational form allows for operating decisions to be decentralised and for strategic decisions to come from the pyramidal top level. It is shown that vertical integration can be an important motivation for the presence of business groups and, unlike some authors, Cainelli and Iacobucci's findings suggest that the level of backward integration is not necessarily negatively linked with the scale of the firm's activity. They following chapter continues to explore both agglomeration and technology and their joint influence on firm strategy. One of the more noteworthy conclusions from this section is that the analysis of specialised clusters shows that agglomeration effects are industry‐specific.

The conclusion section of this book underlines some of the more salient contributions of this work, in particular, in identifying the role of spatial agglomeration in influencing some aspects of firm strategy and organisation. In addition, they establish that groups belonging to industrial districts are less diversified and show a higher degree of spatial concentration. The role of technology is essential in assessing the effects of agglomeration forces, such as the degree of vertical integration. A study of this kind has sizeable contributions to make to understanding the way in which firms are developing and changing their structure and form in response to modern market demands and the influences of globalisation. The fact that the spread of business groups is not only as result of financial aspects, but of strategic and organisational ones as well, means that there are important considerations for policy makers to take into account. This is an informative and at times thought‐provoking book that provides interesting insights into the effects of agglomeration and technology on organisational structure and business groups in particular.