The Role of Internal Capital Market in Business Groups

The aim of this chapter is to discuss the role played by the internal capital market in business groups, the results so far achieved by the literature and to open new lines of research on how these internal flows influence the relations between companies belonging to the same group and in particular the relation between the head and its subsidiaries. The internal capital market may play a dual role. The first is that the presence of internal capital flows within a group can make it easier for companies to survive an external shock, such as an economic-financial crisis. The second is that the internal capital market facilitates the allocation of resources to investment projects, in particular innovative projects, for which it could be difficult to raise external funds. Most of this literature is focused mainly on large groups, undervaluing the relevance and the implications of small and medium-sized business groups.