Strategic adaptations to competition: Supplier investment shifts following import tariff cuts

This paper examines the effects of increased foreign competition on suppliers' choice of relationship-specific investments (RSI). Using import tariff reductions as an exogenous shock, we find that in response to heightened competition, suppliers reallocate their investments from long-term R&D expenses to short-term trade credit, suggesting that they balance the need to retain key customers and mitigate increased holdup risks. Cross-sectional analyses show that the trade-off between R&D and trade credit is most pronounced for firms highly vulnerable to holdup risks, whereas firms more dependent on their supply chain tend to use these RSI complementarily. While suppliers may take other actions, such as cost-cutting and increasing capex, RSI adjustments are more effective in maintaining competitiveness and managing risks amid shifting market dynamics. We confirm the robustness of our results through placebo tests, propensity score matching, entropy balancing, stacked regressions, and alternative tariff cut scenarios.