Working Paper: CEPR ID: DP16677
Authors: Carlo Altomonte; Gianmarco Ottaviano; Armando Rungi; Tommaso Sonno
Abstract: Hierarchical differentiation is a cornerstone of the organizing process. In this paper, we do three things. First, exploiting a newly assembled dataset, we provide the first worldwide overview of the patterns of hierarchical differentiation across Business Groups (BGs), highlighting the coexistence of different hierarchical shapes. Second, we show how the different shapes can arise as optimal hierarchical structures in a knowledge-based model of BGs when subsidiaries’ operations involve ubiquitous problem solving under parents’ supervision. Three primitive characteristics of a BG determine its optimal choice of hierarchical structure: production efficiency and two dimensions of problem solving efficiency related to supervising knowledge creation and handling associated communication across subsidiaries. Third, we check the consistency of the model’s predictions with the empirical patterns for Europe, the US, and the world. The model successfully passes the consistency test.
Keywords: business groups; knowledge hierarchies; multinational enterprises; organization of production
JEL Codes: D23; L23; F23; L25; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| hierarchical differentiation (L22) | production efficiency (D24) |
| hierarchical differentiation (L22) | supervision efficiency (D61) |
| hierarchical differentiation (L22) | communication efficiency (L96) |
| production efficiency (D24) | optimal hierarchical structure (L22) |
| supervision efficiency (D61) | pyramidal structure (L22) |
| communication efficiency (L96) | pyramidal structure (L22) |
| supervision efficiency (D61) | inverse pyramids (Y10) |
| communication efficiency (L96) | inverse pyramids (Y10) |
| US BGs (Y50) | supervision efficiency (D61) |
| US BGs (Y50) | communication efficiency (L96) |
| US BGs (Y50) | production efficiency (D24) |
| European BGs (O52) | supervision efficiency (D61) |
| European BGs (O52) | production efficiency (D24) |