The Strategic Impact of Resource Flexibility in Business Groups

Giacinta Cestone () and Chiara Fumagalli ()
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Giacinta Cestone: Institut de Anàalisi Econòmica (CSIC), CSEF-Università di Salerno, and CEPR
Chiara Fumagalli: Università Luigi Bocconi and CEPR

RAND Journal of Economics, 2005, vol. 36, issue 4, 193-214

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) firm 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.

Date: 2005
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