We use the transactions cost approach to analyse the diversification strategy and the resulting structure chosen by Korean business groups to overcome market imperfections prevalent in developing countries. Business groups which have multidivisional structure are thought to show superior economic performance because such structure reduces transactions costs arising from organizational failure. Also, major Korean business groups have a "relational structure", showing both vertical integration and the characteristics of the conglomerate. We modified the model of Caves and Uekusa [1976] used for Japan to obtain the empirical result that group affiliated firms show superior economic performance.