Competitive Pressure and Corporate Investment: Evidence from Trade Liberalization
University of Maryland - Robert H. Smith School of Business
HEC Paris - Finance Department
February 15, 2013
This paper examines how tougher competition from foreign rivals triggered by trade liberalization affects corporate investment. Using a difference-in-differences framework, we find that, on average, U.S. firms significantly reduce capital and R&D investment and accumulate cash reserves in response to large tariff reductions which induce an inflow of foreign rivals. Moreover, and consistent with theory, firms' reaction to increased competition is heterogeneous and depends on their competitive position as well as on the structure of product markets. Our results highlight that trade globalization and competition from foreign firms is an important factor that shapes the investment choices of U.S. firms.
Number of Pages in PDF File: 49
Keywords: Corporate investment, product market competition, trade liberalization, tariff reduction, cash holdings
JEL Classification: G15, G34, G31working papers series
Date posted: March 16, 2012 ; Last revised: February 20, 2013
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