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The Strategic Impact of Resource Flexibility in Business Groups

Author

Listed:
  • Giacinta Cestone

    (Institut d'Analisi Economica (CSIC), CSEF-Universita` di Salerno, CEPR)

  • Chiara Fumagalli

    (Universita` Bocconi)

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.

Suggested Citation

  • Giacinta Cestone & Chiara Fumagalli, 2005. "The Strategic Impact of Resource Flexibility in Business Groups," RAND Journal of Economics, The RAND Corporation, vol. 36(1), pages 193-214, Spring.
    • Handle: RePEc:rje:randje:v:36:y:2005:1:p:193-214
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    More about this item

    Keywords

    Capital Budgeting; Investment Policy; cost of capital Financing Policy; Capital and Ownership Structure; financial ratios; value of firm Transactional Relationships; Contracts and Reputation; Networks Firm Organization and Market Structure: Markets vs. Hierarchies; Vertical Integration; Conglomerates Capital; Firm; Firms; Subsidiary;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • 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

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