How Does Corporate Investment Respond to Increased Entry Threat?
University of Maryland - Robert H. Smith School of Business
University of Geneva and Swiss Finance Institute
December 17, 2014
HEC Paris Research Paper No. FIN-2014-1046
We use large reductions of import tariffs to examine how incumbent firms modify investment when the threat of entry by foreign rivals intensifies. Incumbents reduce investment by 7.2% of capital in response to higher entry threat. This effect is robust, pervasive, and likely causal. Consistent with predictions of strategic investment models, the investment reduction concentrates in markets where competitive actions are strategic substitutes, where deterring entry is costly, and where investment makes incumbents look soft. Moreover, firms only reduce tangible investment which comprises commitment value, but do not reduce intangible investment. Our results provide novel evidence on how and why market structures and strategic interactions influence corporate investment.
Number of Pages in PDF File: 52
Keywords: Corporate investment, Entry Threat, Tariff Reduction, Strategic Interactions
JEL Classification: G15, G34, G31working papers series
Date posted: March 16, 2012 ; Last revised: December 18, 2014
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