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The Strategic Impact of Resource Flexibility in Business Groups

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  • Giacinta Cestone
  • 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) 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.

Suggested Citation

  • Giacinta Cestone & Chiara Fumagalli, 2003. "The Strategic Impact of Resource Flexibility in Business Groups," Working Papers 49, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:49
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Business groups; financially constrained entry; internal capital markets; multimarkets competition;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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