Size Matters in Business
New firms are discouraged from entering markets where rival companies are backed by wealthy corporate groups, raising concerns over a possible lack of competition in some sectors, a study has found.
Cash-rich corporate groups, which actively switch capital between member firms, frighten off stand-alone competitors who fear they will be unable to compete with the groups’ financial muscle.
The study, carried out by Cass Business School, which is part of City University London, together with other European institutions, examined 70,000 French firms running from 1995 to 2004. It found that companies with the largest market share were in most cases affiliated with corporate groups, particularly in the industrial sector.
Examples of corporate groups include Vivendi and Danone in France, Virgin in the UK, Adidas in Germany, Pirelli in Italy and Tata in India.
Co-author of the study, Dr Giacinta Cestone, a senior lecturer at Cass Business School, said: “Many corporate groups operate an internal capital market, actively redistributing funds among their member firms. This is more likely at times when raising external capital is expensive, or when companies are faced with new competition,” she said.
“Our research indicates this gives group-affiliated firms a clear competitive edge over other companies. We found the rate of new firms entering the market dropped when cash-rich corporate groups were present. This suggests that stand-alone businesses are discouraged from entering potential markets by the deep-pockets of their rivals.”
The decline in competition was found to be greater in markets where it is harder to raise external capital. In particular, companies backed by corporate groups enjoyed a tighter grip on R&D intensive sectors and in industries where firms had fewer tangible assets.Continued on the next page