Conglomerates and Import Penetration

Conglomerates (multi-segments firms) have been criticized for diversification discount– conglomerate segments are traded at a discount compared to similar focused firms.However, people still believe that conglomeration can be a solution when firms havedifficulty getting outside financing as a new view that conglomerates are ready for acomeback has emerged in the wake of the global financial crisis. Globalization isinevitable and it has significantly increased competitive pressure by facilitating thepenetration of foreign rivals into local markets. Understanding how conglomeratesbehave differently as a response to the intensified competition may provide anotherchance for conglomerates to be reevaluated. Conglomerate segments should be able totake actions that are not available to single segment firms as a response to intensifiedcompetition as they have extra source of inside financing, which is internal capitalmarket in a conglomerate. In other words, some segments can benefit from surplus cashof other divisions in a conglomerate.The project aims to investigate how import competition affects conglomerate segmentsdifferently than single segment firms and, hence, to provide a better understanding ofcomprehensive impact of import competition on domestic markets. While several theoriesgenerate predictions on how conglomerate internal capital markets would affectcompetitive outcomes, the preliminary finding that I obtained suggests furtherexploration. Additionally, this project will address a related research question: whichfactors of internal capital markets are indeed important in determining the strategicimpact of internal capital markets. As argued by previous studies, relative financialstrength of internal capital market should matter. Moreover, the level of diversificationand having a financial segment in a conglomerate can generate different competitiveoutcomes for conglomerate segments. Finally, whether the effect of internal capitalmarkets are derived from efficient resource allocation should be explored.