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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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    2. Gao, Yunshu & Yin, Sisi & Ferrett, Ben & Gao, Bo, 2024. "FDI deregulation and firm innovation: Evidence from firm patents," China Economic Review, Elsevier, vol. 83(C).
    3. Aycan Katitas & Sonal Pandya, 2024. "Investment incentives attract foreign direct investment: evidence from the great recession," Public Choice, Springer, vol. 200(1), pages 323-345, July.
    4. Ouyang, Difei, 2024. "State-owned enterprise presence: Local spillovers," China Economic Review, Elsevier, vol. 84(C).
    5. Gu, Grace & Malik, Samreen & Pozzoli, Dario & Rocha, Vera, 2021. "Worker Reallocation, Firm Innovation, and Chinese Import Competition," Working Papers 9-2021, Copenhagen Business School, Department of Economics.
    6. Genthner, Robert & Kis-Katos, Krisztina, 2022. "Foreign investment regulation and firm productivity: Granular evidence from Indonesia," Journal of Comparative Economics, Elsevier, vol. 50(3), pages 668-687.
    7. Monika Sztajerowska, 2021. "International Investment Agreements, Double-Taxation Treaties and Multinational Activity: The (Heterogeneous) Effects of Binding," Working Papers halshs-03265057, HAL.
    8. Dermot Leahy & J. Peter Neary, 2021. "When the threat is stronger than the execution: trade and welfare under oligopoly," RAND Journal of Economics, RAND Corporation, vol. 52(3), pages 471-495, September.
    9. Maria Borga & Perla Ibarlucea Flores & Monika Sztajerowska, 2020. "Drivers of divestment decisions of multinational enterprises - A cross-country firm-level perspective," OECD Working Papers on International Investment 2019/03, OECD Publishing.
    10. Talamas Marcos, Miguel Ángel, 2023. "Surviving Competition: Neighborhood Shops vs. Convenience Chains," IDB Publications (Working Papers) 13018, Inter-American Development Bank.
    11. Brian McCaig & Nina Pavcnik & Woan Foong Wong, 2022. "Foreign and Domestic Firms: Long Run Employment Effects of Export Opportunities," CESifo Working Paper Series 10168, CESifo.
    12. 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).
    13. Yan, Wenshou & Wang, Ruoxuan & Huang, Kaixing & Ouyang, Wenlu, 2024. "Does exporting to China spur firm innovation activities in developing countries?," China Economic Review, Elsevier, vol. 85(C).
    14. Hiroshi Kitamura & Noriaki Matsushima & Misato Sato, 2023. "Which is better for durable goods producers, exclusive or open supply chain?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 32(1), pages 158-176, January.
    15. Pinkus, David & Pozzoli, Dario & Schneider, Cédric, 2024. "Pension Fund Investment and Firm Innovation," Working Papers 1-2024, Copenhagen Business School, Department of Economics.
    16. Beetsma, Roel & Jensen, Svend E. Hougaard & Pinkus, David & Pozzoli, Dario, 2024. "Do Pension Fund Equity Investments Raise Firm Productivity? Evidence From Danish Data," Working Papers 2-2024, Copenhagen Business School, Department of Economics.
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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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