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
April 30, 2014
HEC Paris Research Paper No. FIN-2014-1046
This paper uses reductions of import tariffs to examine how incumbents modify their investment decisions when the threat of entry by foreign rivals suddenly intensifies. We find that incumbents significantly reduce investment by 8.6% in response to higher entry threat following tariff reductions. Various tests indicate that this finding is robust and likely causal. Moreover, and in consistency with strategic investment models, we provide evidence suggesting that the reduction of investment is related to strategic motives to influence the competitive behavior of foreign rivals. Overall, the paper provides novel evidence on how strategic interactions in the product market influence firms' investment decisions.
Number of Pages in PDF File: 45
Keywords: Corporate investment, Entry Threat, Tariff Reduction, Strategic Interactions
JEL Classification: G15, G34, G31working papers series
Date posted: March 16, 2012 ; Last revised: May 20, 2014
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