The Strategic Impact of Resource Flexibility in Business Groups

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The Strategic Impact of Resource Flexibility in Business Groups

Author Info

Giacinta Cestone () (Institut d'Analisi Economica (CSIC), CSEF-Universita` di Salerno, CEPR)
Chiara Fumagalli () (Universita` Bocconi)

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Chiara Fumagalli

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. Ordering information: This article can be ordered from https://pubs3.rand.org/cgi-bin/rje/pdf.cgi.

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Publisher Info
Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 36 (2005)
Issue (Month): 1 (Spring)
Pages: 193-214
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Handle: RePEc:rje:randje:v:36:y:2005:1:p:193-214

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Find related papers by JEL classification:
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

Cited by:
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Christa Hainz, 2006. "Business Groups in Emerging Markets-Financial Control & Sequential Investment," William Davidson Institute Working Papers Series wp830, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
Boutin, Xavier & Cestone, Giacinta & Fumagalli, Chiara & Pica, Giovanni & Serrano-Velarde, Nicolas, 2009. "The Deep Pocket Effect of Internal Capital Markets," CEPR Discussion Papers 7184, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Other versions:
- Xavier Boutin & Giacinta Cestone & Chiara Fumagalli & Giovanni Pica & Nicolas Serrano-Velarde, 2009. "The Deep-Pocket Effect of Internal Capital Markets," CSEF Working Papers 217, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 05 Oct 2009. [Downloadable!]
Christa Hainz, 2006. "Business Groups in Emerging Markets - Financial Control and Sequential Investment," Discussion Papers 124, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
Other versions:
- Christa Hainz, 2006. "Business Groups in Emerging Markets – Financial Control and Sequential Investment," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
- Christa Hainz, 2007. "Business Groups in Emerging Markets: Financial Control and Sequential Investments," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 163(2), pages 336-355, June. [Downloadable!] (restricted)
Heitor Almeida & Daniel Wolfenzon, 2005. "A Theory of Pyramidal Ownership and Family Business Groups," NBER Working Papers 11368, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
George, R. & Kabir, M.R. & Douma, S., 2004. "Business groups and profit redistribution : a boon or bane for firms," Discussion Paper 124, Tilburg University, Center for Economic Research. [Downloadable!]

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