Exploiting Growth Opportunities: The Role of Internal Labor Markets

Giacinta Cestone, Bayes Business School, City University of London and ECGI, Chiara Fumagalli, Università Bocconi, IGIER and CEPR, Francis Kramarz, CREST (ENSAE), Institut Polytechnique de Paris, Uppsala University, and Giovanni Pica, Università della Svizzera Italiana (USI), CSEF, Centro Luca D'Agliano

We explore how business groups use internal labor markets (ILMs) in response to changing economic conditions. We show that following the exit of a large industry competitor, group-affiliated firms expand and gain market share by increasing their reliance on the ILM to ensure swift hiring, especially of technical managers and skilled blue collar workers. The ability to take advantage of this shock to growth opportunities is greater in firms with closer access to their affiliates’ human capital, as geographical proximity facilitates employee relocations across units. Overall, our findings point to the ILM as a prominent mechanism making affiliation with a business group valuable at times of change. For the ILM to perform its role in the face of industry shocks, group sectoral diversification must be combined with geographical proximity between affiliates.