When to Ally? Labor Protection and Firm Growth Strategies
59 Pages Posted: 27 Oct 2018 Last revised: 25 Nov 2018
Date Written: November 22, 2018
We study how increases in employment protection through the passage of state laws affect strategic alliance formation and firm’s choice of growth strategy. We show that, following the adoption of these laws, there is a significant increase in strategic alliance activities, especially among high growth firms. More importantly, there is a shift away from capital-intensive investments, such as internal capital expenditures and M&As towards the more flexible strategic alliance. We also find that firms that form strategic alliances following the adoption of the law have higher innovation output. Overall, our findings are consistent with employment protection making investments within the firm more irreversible and leading them to seek alternative growth strategies by moving investments outside their boundaries through strategic alliance formation.
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