Globalization, Product Market Competition and Corporate Investment

66 Pages Posted: 16 Mar 2012 Last revised: 14 Dec 2012

See all articles by Antonio S. Mello

Antonio S. Mello

University of Wisconsin - Madison - Department of Finance, Investment and Banking

Mengying Wang

University of Wisconsin - Madison - Department of Finance, Investment and Banking

Date Written: August 2, 2012

Abstract

This paper examines the interplay between globalization, product market competition, and corporate investment. We find that imports and foreign direct investment adversely affect domestic firms’ market power, but the effect of imports is more pronounced. We also find that firms with larger losses in market power cut their capital expenditures more when their market power is stronger. Internal funds and market power show a complementary effect on corporate investment. Also, the sensitivity of investment to cash flow declines more when the impact of import competition on firms’ market power increases. Overall, our results suggest that advances in globalization contribute to changes in the structure of the product markets, and firms react by adjusting their investments decisions.

Keywords: Investment, Product Market Compeititon, Import, FDI

JEL Classification: E22, L10, F01

Suggested Citation

Mello, Antonio S. and Wang, Mengying, Globalization, Product Market Competition and Corporate Investment (August 2, 2012). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2023178 or http://dx.doi.org/10.2139/ssrn.2023178

Antonio S. Mello (Contact Author)

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States
608-263-3423 (Phone)
608-265-4195 (Fax)

Mengying Wang

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States
6088867558 (Phone)

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