Market Conditions and the Labor Productivity Advantage of Business Groups

Abstract

Using a large sample of firms from 208 subnational regions across 21 European countries, we investigate if labor market conditions affect the potential value of internal labor markets in business groups—i.e., set of firms under common ownership and control. Building on the “institutional voids” perspective on business groups and the strategic human capital literature, we theorize that slack labor market conditions facilitate and enhance the value of labor reallocations within these interfirm networks by inhibiting trade in human capital outside them. In these environments, we find that firms with internal labor market access—i.e., with an increasing number of sister companies in the same region-industry—show relatively higher labor productivity. Further, our findings suggest that the labor market frictions arising from both slack labor market conditions and employment protection regulations synergize to enhance the benefits of internal labor markets.