Cross-subsidization describes the tendency of multi-business firms to shift resources (especially cash) generated in their highly performing divisions towards their poorly performing divisions, resulting in a distribution of resources that does not always conform to rationally optimal rules.
Studies of capital investment in multi-business firms have uncovered a pattern of significant overinvestment in poorly performing business units, as compared with capital markets’ investment in similar stand-alone businesses, as well as significant underinvestment in highly performing business units. This phenomenon, which seems to rest on the ability of corporations to shift cash across their divisions, has been dubbed cross-subsidization or ‘corporate socialism’.
One of the first studies to observe cross-subsidization in the field is Lamont (1997), which found that oil companies cut investments across the board, including investments in their non-oil divisions, after a...
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Bardolet, D. (2016). Cross-Subsidization. In: Augier, M., Teece, D. (eds) The Palgrave Encyclopedia of Strategic Management. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-94848-2_599-1
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DOI: https://doi.org/10.1057/978-1-349-94848-2_599-1
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