Economies of connectedness: Concept and application

Abstract

We argue that diversification can partly be explained by means of a novel concept, "economies of connectedness", denoting personal relationships of the owners that are used to add new businesses to an otherwise diversified portfolio. Economies of connectedness is a concept that complements those of cronyism and corruption, which by definition are illegal while diversification resulting from sharable personal relations is not necessarily so. The concept is illustrated by an original empirical study of Indonesia's Salim Group. The in-depth longitudinal case study shows the interplay of conventional economies of scope with economies of connectedness. We find that economies of connectedness play an important role for the Group in enhancing diversification in a weak institutional environment. Over time however, economies of connectedness decrease. © 2008 Elsevier Inc. All rights reserved.