Identifying internal markets for resource redeployment

Abstract Research summary This article explores one important way in which multi‐business firms have advantages over single‐business firms. By having flexibility to reallocate resources, such as human capital, production capacity, or equipment, between businesses in their portfolio, they may be able to efficiently expand in markets with strong opportunities and contract in less attractive markets. We provide empirical evidence confirming that compared to single‐business firms in the same industry and of the same size, businesses in multi‐business firms expand revenues 12% more aggressively, and retrench revenues 37% more aggressively, on average. This first generalizable test of the theory also reveals that the relative advantage of multi‐business firms escalates with lower internal resource adjustment costs, higher external transaction costs, and greater opportunity differences with the portfolio. Managerial summary In this article, we show an important way in which multi‐business firms have advantages over single‐business firms. By having flexibility to reallocate resources, such as employees, production capacity, or equipment, between businesses in their portfolio, they may be able to efficiently expand in markets with strong opportunities and contract in less attractive markets. We provide empirical evidence confirming that compared to similar single‐business firms in the same industry and of the same size, businesses in multi‐business firms expand revenues 12% more aggressively, and retrench revenues 37% more aggressively, on average. The article also provides theoretical predictions about when the advantage is most pronounced.