The Strategic Impact of Resource Flexibility in Business Groups

• Authors: Chiara Fumagalli.
• BSE Working Paper: 112300 | September 15
• Keywords: Business groups , financially constrained entry , internal capital markets , multimarkets competition
• JEL codes: G30, L13, L20
• Business groups
• financially constrained entry
• internal capital markets
• multimarkets competition

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.