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The Strategic Impact of Resource Flexibility in Business Groups


  • Giacinta Cestone

    () (Institut de Anàalisi Econòmica (CSIC), CSEF-Università di Salerno, and CEPR)

  • Chiara Fumagalli

    () (Università Luigi Bocconi and CEPR)


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(4), pages 193-214, Winter.
  • Handle: RePEc:rje:randje:v:36:y:2005:4:p:193-214

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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Boutin, Xavier & Cestone, Giacinta & Fumagalli, Chiara & Pica, Giovanni & Serrano-Velarde, Nicolas, 2013. "The deep-pocket effect of internal capital markets," Journal of Financial Economics, Elsevier, vol. 109(1), pages 122-145.
    3. Raffaele Santioni & Ilaria Supino, 2018. "Internal capital markets in Italian business groups: evidence from the financial crisis," Questioni di Economia e Finanza (Occasional Papers) 421, Bank of Italy, Economic Research and International Relations Area.
    4. Christa Hainz, 2006. "Business Groups in Emerging Markets – Financial Control and Sequential Investment," CESifo Working Paper Series 1763, CESifo Group Munich.
    5. George, Rejie & Kabir, Rezaul, 2008. "Business groups and profit redistribution: A boon or bane for firms?," Journal of Business Research, Elsevier, vol. 61(9), pages 1004-1014, September.
    6. Sharon Belenzon & Ulya Tsolmon, 2016. "Market frictions and the competitive advantage of internal labor markets," Strategic Management Journal, Wiley Blackwell, vol. 37(7), pages 1280-1303, July.
    7. 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.
    8. repec:spr:weltar:v:153:y:2017:i:3:d:10.1007_s10290-017-0281-5 is not listed on IDEAS
    9. Gatzer, Sebastian & Hoang, Daniel & Ruckes, Martin, 2015. "Internal Capital Markets and Diversified Firms: Theory and Practice," EconStor Preprints 169432, ZBW - German National Library of Economics.
    10. Tarun Khanna & Yishay Yafeh, 2007. "Business Groups in Emerging Markets: Paragons or Parasites?," Journal of Economic Literature, American Economic Association, vol. 45(2), pages 331-372, June.
    11. Curtiss, Jarmila, 2012. "Determinants of Financial Capital Use: Review of theories and implications for rural businesses," Working Papers 122846, Factor Markets, Centre for European Policy Studies.
    12. Löffler, Clemens & Pfeiffer, Thomas, 2013. "Centralized versus Decentralized External Financing, Winner Picking and Corporate Socialism," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79902, Verein für Socialpolitik / German Economic Association.
    13. Xavier, Wlamir Gonçalves & Bandeira-de-Mello, Rodrigo & Marcon, Rosilene, 2014. "Institutional environment and Business Groups' resilience in Brazil," Journal of Business Research, Elsevier, vol. 67(5), pages 900-907.
    14. I-Ju Chen, 2016. "Corporate Governance and the Efficiency of Internal Capital Markets," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(02), pages 1-50, June.

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