Capturing Value From Investment Opportunities Under Product-Market Competition: When Do Internal Capital Markets Matter?

The view that a business unit can better compete against product-market rivals if granted funding from its parent firm’s internal capital market (ICM) has lost traction within strategy, despite conflicting evidence. The authors develop a theory to explain when funding from a parent firm’s ICM should enable a business unit to more effectively capture value (i.e., profit) from its investment opportunities under product-market competition. The authors depart from prior theories by examining how opportunities relate to competition. Specifically, they propose a typology of opportunities along two strategic dimensions. The first dimension is firm-specificity, a concept derived from the resource-based view. It refers to whether an opportunity stems from unique firm resources and capabilities and is therefore exclusive to a business unit rather than shared with (and contestable by) its product-market rivals. The second dimension is uncertainty about the investment path, a concept derived from the literature on investment under uncertainty and real options. When present, it is impossible (and undesirable) to commit upfront to a fully predetermined set of investments in an opportunity. These dimensions imply that different opportunities may have distinct critical needs in terms of funding - such as secrecy, timeliness, and reliability - that must be satisfied for a business unit to capture value. Ultimately, the authors' theory indicates that receiving funding from a parent firm’s ICM increases a business unit’s chances of capturing value when those critical needs are present, suggesting that units with ICM funding may prevail in some competitive environments.