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Foreign Rivals Are Coming to Town: Responding to the Threat of Foreign Multinational Entry

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  • Cathy Ge Bao
  • Maggie Xiaoyang Chen

Abstract

How do domestic firms respond to the threat of foreign competition? This paper quantifies foreign competition threats by exploiting news of potential multinational investments from over 35,000 media outlets around the world. Using firm-specific measures of foreign competition threat, the analysis shows that domestic firms respond by upgrading productivity, raising innovation, and altering product composition. However, there is a U-shape relationship between initial productivity and productivity growth where the right and left tails upgrade productivity through innovation and product dropping, respectively. These responses constitute an economically important source of gains and convey new implications for the timing of economic policies.

Suggested Citation

  • Cathy Ge Bao & Maggie Xiaoyang Chen, 2018. "Foreign Rivals Are Coming to Town: Responding to the Threat of Foreign Multinational Entry," American Economic Journal: Applied Economics, American Economic Association, vol. 10(4), pages 120-157, October.
  • Handle: RePEc:aea:aejapp:v:10:y:2018:i:4:p:120-57
    Note: DOI: 10.1257/app.20170113
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    More about this item

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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