Unlocking Growth: How Internal Labor Markets Give Business Groups the Edge

In today’s fast-paced economy, where agility can make or break a business, the internal labor market (ILM) within a business group can make a huge difference. A recent study by Chiara Fumagalli (Bocconi’s Department of Economics), Giacinta Cestone (Bayes Business School, City University of London), Francis Kramarz (Collège de France) and Giovanni Pica (Università della Svizzera Italiana, Switzerland) and published in the Review of Economic Studies has investigated just how powerful this pool of resources can be for business groups looking to exploit growth opportunities. In their new study, they reveal how business groups—defined as networks of affiliated firms controlled by a common ultimate owner—tap into their own workforce to thrive in response to economic shocks.

The research takes an in-depth look at business groups in France, where a sudden market change—such as the exit of a large competitor—creates a unique growth opportunity. What sets successful business groups apart, according to this study, is their ability to quickly redeploy talent across affiliate firms. By leveraging their internal labor pool, business groups gain a significant competitive edge, boosting their market share while their rivals are forced to hire externally.

Following a competitor’s demise, firms within business groups increased their internal hiring by as much as 17-26%, according to the study. The internal labor market is used mainly to hire skilled workers—particularly those in technical fields like engineering. In industries where hiring skilled talent is both slow and expensive, these firms are able to quickly adapt, thanks to their internal talent pipeline. The research documents that, “by reassigning workers where they’re most needed, business groups can respond to new opportunities much more swiftly than firms that rely solely on external labor markets.” 

The true effectiveness of ILMs depends on two critical factors: geographic proximity and industry diversification within the group. When affiliates are close together, moving people around is simpler, and when a business group operates in different industries, it can shift resources from underperforming areas to those with high potential. In fact, one of the most striking aspects of the research is the light it sheds on how these internal labor systems help solve a much bigger problem: labor market inefficiency. By reallocating workers where they are most productive, ILMs don’t just benefit individual business groups—they help reduce overall labor misallocation in the economy, which is good for the broader community.

“The importance of internal labor markets,” Fumagalli explains, “lies in the fact that they allow firms to respond immediately when the right opportunity comes along, bypassing the bottlenecks and costs of external hiring. Internal labor markets give business groups the flexibility and speed they need to stay ahead. It’s not just about filling positions—it’s about strategically positioning your talent to unlock growth when it matters most.”