Product Market Competition and Corporate Investment: An Empirical Analysis

Abstract

Using both SIC-based and text-based measures of industry concentration, we show that firms operating in competitive industries invest significantly more in both physical capital and R&D relative to their peers in concentrated industries. Our estimates show a 14% ($110 billion) loss of capital expenditure over the course of the past decade, attributable to the increased levels of concentration. Controlling for competition from imports, and the presence of stronger corporate governance do not change the main findings. The results are consistent with the notion that the incentive to invest and innovate in order to survive and escape competition for firms in competitive industries is stronger than the corresponding incentive for firms in concentrated industries to preserve and enhance their existing monopoly rents. Our findings have policy implications in that investment and innovation, and hence economic growth may be adversely affected in the current era of increasing industry concentration and declining competition.

Keywords: Corporate Investments, Industry Concentration, Competition, Corporate Governance, Herfindahl-Hirschman Index (HHI)

JEL Classification: G31, G3, G39