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The Strategic Impact of Resource Flexibility in Business Groups

  • Giacinta Cestone

    ()

    (Institut de An�alisi Econ�mica (CSIC), CSEF-Universit� di Salerno, and CEPR)

  • Chiara Fumagalli

    ()

    (Universit� Luigi Bocconi and CEPR)

Registered author(s):

    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.

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

    Volume (Year): 36 (2005)
    Issue (Month): 4 (Winter)
    Pages: 193-214

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    Handle: RePEc:rje:randje:v:36:y:2005:4:p:193-214
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