ABSTRACT
Focusing on business responsiveness and market power and risk, I/O economics recommends firms to diversify in unrelated businesses to spread risk and to generate uncorrelated cash flows that can be used to increase market power through cross-subsidization. However, a multi-business firm with independent and autonomous business units might not be able to create additional value at the corporate level compared to single business firms. According to transaction cost theory, two different types of markets influence a firm's diversification strategy: the capital market and the market for excess resources. Consistent with I/O economics, transaction cost theory also explains how and why multi-business firms that diversified into unrelated business should create an internal capital market to create corporate value. Agency theory provides recommendations related to the alignment between a firm's business portfolio and the role of the corporate headquarters. This chapter reviewes the main theories pertaining to corporate level strategy and the management of the multibusiness firm.
