Competitive Pressure and Corporate Investment: Evidence from Trade Liberalization

Abstract:     
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, G31

working papers series