Product-market Competition and the Redistribution of Resources in the Multi-business Firm
Abstract: This paper investigates how diversified firms allocate non scale-free resources across their business units (BUs). In particular, we exploit exogenous variations in the intensity of competition in the product-market of one of the BUs of the firm to proxy for changes in the opportunity cost of using non scale-free resources. Consistent with the hypotheses, we find that an increase in competition experienced by one of the BUs of the firm triggers a redistribution of resources in favor of the BU affected by it. Further, we find evidence that the relative resource management ability of the BU experiencing the increase in competition is a positive factor moderating the relationship. Instead, the relative size of the BU in comparison with the total size of the firm moderates the relationship negatively by affecting the ability of the firm to release non scale-free resources. Finally, we also examine how the fungibility of scale-free resources across the product-markets of a diversified firm influences resource reallocation. While in our initial analysis we obtain only partial evidence supporting the idea that scale-free resource relatedness is a negative moderator of the relationship between competition and resource reallocation, additional tests included in the paper suggest that the relationship might depend on the effect of competition on the value of the scale-free resource under consideration.