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Multi-product firms, though more efficient, have a dark side, they trade at a conglomerate
discount. Exporters suffer a smaller conglomerate discount compared to domestic firms. We
introduce an internal capital market into a two factor model of multi-product firms to explain
these facts. We find that in the competition for funds inside the firm, the managers of the best 
divisions are empire builders and strategically over-report their costs receiving excessive financing
possibly crowding out funding of less good divisions. This pattern of capital allocation is consistent
with the observed capital expenditures across divisions of publicly listed US companies
and explains the lower market to book value of conglomerates. We find further that a tougher
trade environment leaves less room for the mis-reporting of costs improving the efficiency of
the internal capital market. Finally, we find that firms face a trade-o between introducing a
new product or exporting an existing one which tends to make exporters less diversified than
domestic firms. The latter two mechanisms explain why the conglomerate discount is lower for
exporters.