Business groups and their internal capital markets: the foreign and Russian experience

In: Moscow University Economics Bulletin, Heft 5, S. 72-90

Abstract

Modern business groups have a powerful impact on the economic development of both developed and developing countries making it relevant to study the economic foundations of the success of these institutional structures. The article provides a systematization of international and national experience in the functioning of internal capital markets of business groups that can become one of most important strategic advantages of business groups by providing member companies with "exclusive" opportunities for efficient redistribution of intragroup funds. The methodological base of the study incorporates methods of systematization as well as statistical and comparative analysis. The study shows that business groups make a significant contribution to industrial production and, representing a large part of corporate sector (in terms of number of participants, industry coverage, size of assets, profits and market capitalization), play a significant role in the economic development of various countries. Internal capital markets of business groups are used to mitigate financing constraints and rescue weak member-companies, thus, help maintain and further strengthen the positions of integrated structures. Drawing on a wide range of empirical studies, the article highlights key effects of the redistribution of group financial resources in the context of three fundamental motives of controlling owners. The study demonstrates that under the current economic conditions Russian companies affiliated with business groups are imposed with more prerequisites to use internal capital markets to overcome external financing deficit. Estimated amounts of funds involved in financial transactions with related parties confirm the thesis on the growing role of Russian business groups' internal capital markets in corporate financing activities. Results and conclusions of this paper can be applied in practice by consultants and financial managers seeking to improve the funding of companies affiliated with both Russian and foreign business groups.