How Does Corporate Investment Respond to Increased Entry Threat?
59 Pages Posted: 16 Mar 2012 Last revised: 29 Oct 2015
Date Written: October 28, 2015
We study how product market interactions affect investment. We use reductions of import tariffs to examine how incumbents modify investment when the threat of rivals' entry intensifies. Incumbents reduce investment by 7.2% in response to higher entry threat. Consistent with a strategic behavior, the investment reduction varies across market structures: It concentrates in markets where competitive actions are strategic substitutes, where deterring entry is costly, and where investment makes incumbents look soft. Our results provide novel evidence on how and why firms' interactions influence corporate investment.
Keywords: Corporate investment, Entry Threat, Strategic Interactions, Market Structures
JEL Classification: G15, G34, G31
Suggested Citation: Suggested Citation