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The Strategic Impact of Resource Flexibility in Business Groups

Author

Listed:
  • Giacinta Cestone

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

  • Chiara Fumagalli

    (Università Luigi Bocconi and CEPR)

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