Diversified business groups offer improved growth


Firms that belong to diversified business groups can better exploit growth opportunities, thanks to the ability to draw on the group's skilled human capital, according to new research from Cass Business School.

Insurance Between Firms: The Role of Internal Labor Markets shows that corporate networks of companies controlled by a common owner are better able to respond to positive shocks (but also to withstand adverse shocks) when compared to their stand-alone rivals.

Diversified business groups make up the largest part of many economies in continental Europe, China and India amongst others. Examples of such groups include Samsung, Virgin and Tata, which all operate in multiple regions and industries. Leading financial service organisations such as Citigroup and HSBC are also structured as groups, with a holding company controlling a network of legal entities operating in different countries.

The research finds that business groups run their internal labour markets, reallocating workers across member firms (subsidiaries) in response to both positive and adverse shocks.

Co-author Dr Giacinta Cestone, Cass Business School, said the research confirmed that internal labour markets are vital for organisational growth.

"Faced with a new expansion opportunity, for example following a major competitor's exit, group-affiliated subsidiaries heavily rely on their group's internal labour market to hire managers, engineers, and other skilled human capital.

"Group subsidiaries which are geographically closer to the bulk of the group's human capital become more productive and gain more market share after the positive shock, when compared to member firms that are less well placed to attract the group's talent," she said.

"Access to the group's internal labour market thus mitigates human capital constraints, which helps explain the paper's second finding that group-affiliated firms expand their market share more than their stand-alone peers after a positive shock.

"Internal labour markets operate as a mutual insurance mechanism across member firms in diversified business groups, allowing them to mitigate firing and hiring costs when workforce adjustments are called for. This may contribute to explaining the groups' unique ability to thrive in the face of hurdles and opportunities. Internal labour markets also appear to provide job security to corporate groups' employees," she added.

In light of the authors' results, geographically diversified groups with a presence in both UK and Continental Europe can rely on their internal labour market to better respond to the hurdles and opportunities of Brexit. If devoid of frictionless access to the common market, such groups can swiftly move valuable human capital to their EU subsidiaries, whilst smaller UK-only based companies would not be in a position to respond as promptly to the challenge.

Funded by the Axa Research Fund and the Leverhulme Trust, this research is unique because it examines firm-level data (profits, productivity, leverage), combined with data on workers' movements and, uniquely, each business group's precise structure.

The data covers the universe of French firms (both private and listed), comprising balance sheets and income statements. A database of matched employer-employee information (based on mandatory employer reports of the earnings and the position of all employees subject to payroll taxes) allowed the researchers to follow all French workers as they moved from one firm to another.

The research was carried out by Dr Giacinta Cestone, Cass Business School, London and colleagues from CREST-ENSAE (France), Bocconi University (Italy), and Universita' della Svizzera Italiana (Switzerland).

Read the report

The report is published in the ECGI Working Paper series and can be read here.


Report authors

  • Dr Giacinta Cestone, Cass Business School
  • Professor Chiara Fumagalli, Bocconi University
  • Professor Francis Kramarz, CREST (ENSAE), Paris
  • Professor Giovanni Pica, Università della Svizzera Italiana (USI)

Media enquiries

Amy Ripley, Senior Communications Officer, Cass Business School
M: +44 (0) 7794 053 384 E: [email protected]

Notes to Editors

Cass Business School, which is part of City, University of London, is a leading global business school driven by world-class knowledge, innovative education and a vibrant community. Located in the heart of one of the world's leading financial centres, Cass has strong links to both the City of London and the thriving entrepreneurial hub of Tech City.

Media Contact

Amy Ripley
[email protected]



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