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

Author

Listed:
  • Cathy Ge Bao

    (University of International Business and Economics)

  • Maggie X. Chen

    (George Washington University)

Abstract

This paper quantiÖes the threat of foreign competition by exploring news of foreign multinational investment appearing in over 35,000 newspapers, business presses, magazines, newswires, and other forms of media in 200 countries. Using unique time-variant firm-specic measures of foreign multinational threat, the analysis shows that domestic firms respond to the threats by upgrading productivity, raising innovation, investment and wage rate, and altering product composition. However, the responses exhibit substantial heterogeneity across firms: within each industry, the right tail of the domestic productivity distribution responds by increasing innovation while the left tail escapes competition threats by dropping products, leading to a U-shape relationship between initial productivity and productivity growth. Actual multinational competition, in contrast, leads to product dropping only. These previously unexplored responses to the threat of foreign competition constitute an economically important source of gains from globalization and convey new implications for the timing, evolvement, and form of industrial, trade and investment policies.

Suggested Citation

  • Cathy Ge Bao & Maggie X. Chen, 2016. "Foreign Rivals are Coming to Town: Responding to the Threat of Foreign Multinational Entry," Working Papers 2016-22, The George Washington University, Institute for International Economic Policy.
  • Handle: RePEc:gwi:wpaper:2016-22
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    2. Chen, Maggie Xiaoyang & Lin, Chuanhao, 2020. "Geographic connectivity and cross-border investment: The Belts, Roads and Skies," Journal of Development Economics, Elsevier, vol. 146(C).
    3. Hiroshi Kitamura & Noriaki Matsushima & Misato Sato, 2021. "Defending home against giants: Exclusive dealing as a survival strategy for local firms," ISER Discussion Paper 1122, Institute of Social and Economic Research, Osaka University.

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    More about this item

    Keywords

    threat; foreign investment news; and domestic Örm responses;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • F2 - International Economics - - International Factor Movements and International Business
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • D2 - Microeconomics - - Production and Organizations

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