The Strategic Impact of Resource Flexibility in Business Groups

Giacinta Cestone and Chiara Fumagalli

No 49, Working Papers from Barcelona School of Economics

Abstract: We show that in business groups with efficient internal capital markets resources may be channelled to either more or less profitable units. Depending on the amount of internal resources, a group may exit a market in response to increased competition, or channel funds to the subsidiary operating in that market. This has important implications for the strategic impact of group membership. Affiliation to a monopolistic subsidiary can make a cash-rich (poor) stand-alone more (less) vulnerable to entry deterrence. Also, resource flexibility within a group makes subsidiaries' reaction functions flatter, thus discouraging rivals' strategic commitments when entry is accommodated.

Keywords: Business groups; financially constrained entry; internal capital markets; multimarkets competition (search for similar items in EconPapers)
JEL-codes: G30 L13 L20 (search for similar items in EconPapers)
Date: 2015-09
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