PDF Ebook The strategic impact of resource flexibility in business groups
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 rather 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 stand-alone firm more vulnerable to entry deterrence. Conversely, a cash-poor firm becomes less sensitive to its financial constraints upon affiliation to a group, and thus less vulnerable to entry deterrence. Finally, resource flexibility within a group makes subsidiaries’ reaction functions flatter, thus discouraging rivals’ strategic commitments when entry is accommodated.
Business groups are a widespread organizational form in many countries. Groups often adopt a pyramidal structure, whereby individual subsidiaries are separate legal entities with limited liability and autonomous access to external capital markets. This marks a clear difference between business groups and multidivisional organizations.1 Yet, there is substantial evidence that groups establish internal capital markets just like multidivisional firms do.2 While many empirical studies of internal capital markets have looked at business groups, theoretical models have instead focussed on multidivisional firms. This paper is one of the first attempts to model the allocation of internal resources among group members.
The idea that business groups behave somehow differently in product markets is by no means new. In particular, competition authorities around the world since the Standard-Oil case have taken seriously the idea that firms’ access to a group’s deep pockets may be a source of market power.3 However, the exact mechanism through which the ability to shift resources across group membersaffects their competitive behavior has not been clarified yet. For instance, while some empirical studies suggest that groups do better than stand-alone firms in deterring entry (Lawrence, 1991), formal reasoning indicates that resource flexibility may well prevent a group from committing to provide a member firm with deep-pockets (Matsusaka and Nanda, 2002). This paper studies how internal resources are reallocated in response to changes in a group’s actual or prospective markets, and how this in turn affects its members’ competitive behavior. It thus provides a formal analysis of multimarket spillovers generated by internal capital market phenomena.
Download
PDF Ebook The strategic impact of resource flexibility in business groups
Posted in :
