Abstract: How does internal capital transaction impact subsidiaries' competition advantage? Based on the conflicts of internal capital market availability and unavailability, we employ the perspective of information asymmetry to study the relationship between internal capital transaction and subsidiary innovation. Using the samples of listed subsidiaries from 2009 to 2017, the empirical results show that:the internal capital transaction has an inverted U-shaped effect on subsidiary innovation; the dependence on internal capital market is adverse to fostering innovation capability of subsidiaries, and weakens the internal capital transaction-subsidiary innovation linkages; the dependence on external capital market is benefit to subsidiary innovation, and also weakens the inverted U-shaped relationship between internal capital transaction and subsidiary innovation. Further study shows that dependence of SOE' subsidiaries on internal capital market is adverse to fostering innovation capability, but subsidiaries of private business groups can depend on both internal and external capital markets to improve innovation performance.

Key words: capital transaction, market dependence, business groups, corporate innovation