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Abstract
Using novel data on European firms, this paper examines the effect of business group affiliation on
innovation. We find that business groups foster the scale and novelty of corporate innovation. Group
affiliation is particularly important in industries that rely more on external finance and have a higher
degree of information asymmetry. We also find that the innovation of affiliates is less sensitive to
operating cash flows. We interpret our results as supporting the ‘bright side' of business group
internal capital markets and explain how legal boundaries between group affiliates mitigate the
inefficiencies found in internal capital markets of US conglomerates.
Keywords: business groups, innovation, internal capital markets
JEL Classifications: G34, L22, L26, and O32
This paper was produced as part of the Centre's Productivity and Innovation Programme. The Centre
for Economic Performance is financed by the Economic and Social Research Council.......

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Approximate Word Count: 13566
Approximate Pages: 55 (250 words per double-spaced page)

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