Hostname: page-component-77c89778f8-sh8wx Total loading time: 0 Render date: 2024-07-19T02:00:27.379Z Has data issue: false hasContentIssue false
  • English
  • Français

Product Market Competition and FDI Decisions

Published online by Cambridge University Press:  18 July 2022

Tiago Loncan Open the ORCID record for Tiago Loncan [Opens in a new window]
Tiago Loncan*
Affiliation:
King’s College London King’s Business School
*
tiago.loncan@kcl.ac.uk
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

I examine whether competition from domestic industry rivals affects firms’ proclivity to undertake foreign direct investment (FDI) and their country location choices. I find that competition affects foreign production decisions and the geography of international investments. While firms enduring stiffer competition are significantly less likely to undertake FDI, this effect is heterogeneous across firms. Competition deters FDI more strongly when costs are heavier, whereas it has weaker effects when efficiency is higher, growth opportunities are valuable, and cash reserves are higher. FDI location models suggest that when going abroad, firms facing stronger competition are more likely to pursue economies of productivity and taxation.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 6 , September 2023 , pp. 2617 - 2656
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

I am grateful to Dimitris Andriosopoulos, Warren Bailey, Eric de Bodt (the referee), Sabri Boubaker, Jarrad Harford (the editor), Andrew Marshall, Syrine Sassi, Philip Valta, and the participants at the 2021 Royal Economic Society Conference, the 2021 Financial Management Association Annual Meeting, and the 2021 IFABS Oxford Conference for helpful comments and suggestions. Any errors are my own.

References

Aeberhardt, R.; Buono, I.; and Fadinger, H.. “Learning, Incomplete Contracts and Export Dynamics: Theory and Evidence from French Firms.” European Economic Review, 68 (2014), 219–249.Google Scholar
Agrawal, A. K., and Matsa, D. A.. “Labor Unemployment Risk and Corporate Financing Decisions.” Journal of Financial Economics, 108 (2013), 449–470.Google Scholar
Aguerrevere, F. L. “Real Options, Product Market Competition, and Asset Returns.” Journal of Finance, 64 (2009), 957–983.Google Scholar
Ahn, S.; Denis, D. J.; and Denis, D. K.. “Leverage and Investment in Diversified Firms.” Journal of Financial Economics, 79 (2006), 317–337.Google Scholar
Aivazian, V. A.; Ge, Y.; and Qiu, J.. “The Impact of Leverage on Firm Investment: Canadian Evidence.” Journal of Corporate Finance, 11 (2005), 277–291.Google Scholar
Akdoğu, E., and MacKay, P.. “Investment and Competition.” Journal of Financial and Quantitative Analysis, 43 (2008), 299–330.Google Scholar
Alexeev, M., and Song, Y.. “Corruption and Product Market Competition: An Empirical Investigation.” Journal of Development Economics, 103 (2013), 154–166.Google Scholar
Anderson, J. E., and Van Wincoop, E.. “Trade Costs.” Journal of Economic Literature, 42 (2004), 691–751.Google Scholar
Angrist, J. D., and Pischke, J. S.. Mostly Harmless Econometrics. Princeton, NJ: Princeton University Press (2009).Google Scholar
Antras, P., and Helpman, E.. “Global Sourcing.” Journal of Political Economy, 112 (2004), 552–580.Google Scholar
Arellano, M., and Bond, S.. “Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations.” Review of Economic Studies, 58 (1991), 277–297.Google Scholar
Arulampalam, W.; Devereux, M. P.; and Liberini, F.. “Taxes and the Location of Targets.” Journal of Public Economics, 176 (2019), 161–178.Google Scholar
Auty, R. M. “Natural Resources, Capital Accumulation and the Resource Curse.” Ecological Economics, 61 (2007), 627–634.Google Scholar
Aw, B. Y., and Lee, Y.. “Firm Heterogeneity and Location Choice of Taiwanese Multinationals.” Journal of International Economics, 75 (2008), 167–179.Google Scholar
Azzimonti, M. “The Politics of FDI Expropriation.” International Economic Review, 59 (2018), 479–510.Google Scholar
Azzimonti, M. “Does Partisan Conflict Deter FDI Inflows to the US?” Journal of International Economics, 120 (2019), 162–178.Google Scholar
Baldwin, R., and Krugman, P.. “Persistent Trade Effects of Large Exchange Rate Shocks.” Quarterly Journal of Economics, 104 (1989), 635–654.Google Scholar
Barrios, S.; Huizinga, H.; Laeven, L.; and Nicodème, G.. “International Taxation and Multinational Firm Location Decisions.” Journal of Public Economics, 96 (2012), 946–958.Google Scholar
Becerra, M.; Markarian, G.; and Santalo, J.. “The Effect of Import Competition on Product Diversification Revisited.” Strategic Management Journal, 41 (2020), 2126–2152.Google Scholar
Bekaert, G.; Harvey, C. R.; Lundblad, C. T.; and Siegel, S.. “Political Risk Spreads.” Journal of International Business Studies, 45 (2014), 471–493.Google Scholar
Belderbos, R.; Park, J.; and Carree, M.. “Do R&D Investments in Weak IPR Countries Destroy Market Value? The Role of Internal Linkages.” Strategic Management Journal, 42 (2021), 1401–1431.Google Scholar
Bertrand, M., and Mullainathan, S.. “Enjoying the Quiet Life? Corporate Governance and Managerial Preferences.” Journal of Political Economy, 111 (2003), 1043–1075.Google Scholar
Bhattacharya, U.; Galpin, N.; and Haslem, B.. “The Home Court Advantage in International Corporate Litigation.” Journal of Law and Economics, 50 (2007), 625–660.Google Scholar
Blonigen, B. A. “A Review of the Empirical Literature on FDI Determinants.” Atlantic Economic Journal, 33 (2005), 383–403.Google Scholar
Blundell, R.; Bond, S.; Devereux, M.; and Schiantarelli, F.. “Investment and Tobin’s Q: Evidence from Company Panel Data.” Journal of Econometrics, 51 (1992), 233–257.Google Scholar
Bowman, E. H. “Risk Seeking by Troubled Firms.” Sloan Management Review (Pre-1986), 23 (1982), 33.Google Scholar
Braconier, H.; Norback, P.-J.; and Urban, D.. “Multinational Enterprises and Wage Costs: Vertical FDI Revisited.” Journal of International Economics, 67 (2005), 446–470.Google Scholar
Cai, H., and Liu, Q.. “Competition and Corporate Tax Avoidance: Evidence from Chinese Industrial Firms.” Economic Journal, 119 (2009), 764–795.Google Scholar
Cameron, A. C., and Trivedi, P. K.. Microeconometrics Using Stata, Vol 2. College Station, TX: Stata Press (2010).Google Scholar
Cao, C.; Li, X.; and Liu, G.. “Political Uncertainty and Cross-Border Acquisitions.” Review of Finance, 23 (2019), 439–470.Google Scholar
Carr, D. L.; Markusen, J. R.; and Maskus, K. E.. “Estimating the Knowledge-Capital Model of the Multinational Enterprise.” American Economic Review, 91 (2001), 693–708.Google Scholar
Castellani, D., and Lavoratori, K.. “The Lab and the Plant: Offshore R&D and Co-Location with Production Activities.” Journal of International Business Studies, 51 (2020), 121–137.Google Scholar
Chen, M. X., and Moore, M. O.. “Location Decision of Heterogeneous Multinational Firms.” Journal of International Economics, 80 (2010), 188–199.Google Scholar
Cheng, L. K., and Kwan, Y. K.. “What are the Determinants of the Location of Foreign Direct Investment? The Chinese Experience.” Journal of International Economics, 51 (2000), 379–400.Google Scholar
Crescenzi, R.; Ganau, R.; and Storper, M.. “Does Foreign Investment Hurt Job Creation at Home? The Geography of Outward FDI and Employment in the USA.” Journal of Economic Geography, 22 (2022), 53–79.Google Scholar
Cuñat, V., and Guadalupe, M.. “How does Product Market Competition Shape Incentive Contracts?” Journal of the European Economic Association, 3 (2005), 1058–1082.Google Scholar
Desai, M. A., and Dharmapala, D.. “Corporate Tax Avoidance and Firm Value.” Review of Economics and Statistics, 91 (2009), 537–546.Google Scholar
Desai, M. A.; Foley, C. F.; and Hines, J. R. “A Multinational Perspective on Capital Structure Choice and Internal Capital Markets.” Journal of Finance, 59 (2004), 2451–2487.Google Scholar
Desai, M. A.; Foley, C. F.; and Hines, J. R. “Capital Structure with Risky Foreign Investment.” Journal of Financial Economics, 88 (2008), 534–553.Google Scholar
Desbordes, R., Wei, S.-J.. “The Effects of Financial Development on Foreign Direct Investment.” Journal of Development Economics, 127 (2017), 153–168.Google Scholar
Devereux, M. P., and Griffith, R.. “Taxes and the Location of Production: Evidence from a Panel of US Multinationals.” Journal of Public Economics, 68 (1998), 335–367.Google Scholar
Dixit, A. “Hysteresis, Import Penetration, and Exchange Rate Pass-Through.” Quarterly Journal of Economics, 104 (1989), 205–228.Google Scholar
Doornik, B. F. N. V.; Fazio, D.; Schoenherr, D.; and Skrastins, J.. “Unemployment Insurance as a Subsidy to Risky Firms.” Working Paper, Banco Central do Brasil (2021).Google Scholar
Doukas, J., and Travlos, N. G.. “The Effect of Corporate Multinationalism on Shareholders’ Wealth: Evidence from International Acquisitions.” Journal of Finance, 43 (1988), 1161–1175.Google Scholar
Duanmu, J.-L. “Firm Heterogeneity and Location Choice of Chinese Multinational Enterprises (MNEs).” Journal of World Business, 47 (2012), 64–72.Google Scholar
Duanmu, J.-L. “State-Owned MNCs and Host Country Expropriation Risk: The Role of Home State Soft Power and Economic Gunboat Diplomacy.” Journal of International Business Studies, 45 (2014), 1044–1060.Google Scholar
Dunning, J. H. “Toward an Eclectic Theory of International Production: Some Empirical Tests.” Journal of International Business Studies, 11 (1980), 9–31.Google Scholar
Fan, H.; Lin, F.; and Tang, L.. “Minimum Wage and Outward FDI from China.” Journal of Development Economics, 135 (2018), 1–19.Google Scholar
Feenstra, R. C.; Inklaar, R.; and Timmer, M. P.. “The Next Generation of the Penn World Table.” American Economic Review, 105 (2015), 3150–3182.Google Scholar
Foley, C. F.; Hartzell, J. C.; Titman, S.; and Twite, G.. “Why do Firms Hold so Much Cash? A Tax-Based Explanation.” Journal of Financial Economics, 86 (2007), 579–607.Google Scholar
Frésard, L. “Financial Strength and Product Market Behavior: The Real Effects of Corporate Cash Holdings.” Journal of Finance, 65 (2010), 1097–1122.Google Scholar
Frésard, L., and Valta, P.. “How does Corporate Investment Respond to Increased Entry Threat?” Review of Corporate Finance Studies, 5 (2016), 1–35.Google Scholar
Gao, G. Y.; Wang, D. T.; and Che, Y.. “Impact of Historical Conflict on FDI Location and Performance: Japanese Investment in China.” Journal of International Business Studies, 49 (2018), 1060–1080.Google Scholar
Giambona, E.; Graham, J. R.; and Harvey, C. R.. “The Management of Political Risk.” Journal of International Business Studies, 48 (2017), 523–533.Google Scholar
Giroud, X., and Mueller, H. M.. “Does Corporate Governance Matter in Competitive Industries?” Journal of Financial Economics, 95 (2010), 312–331.Google Scholar
Giroud, X., and Mueller, H. M.. “Corporate Governance, Product Market Competition, and Equity Prices.” Journal of Finance, 66 (2011), 563–600.Google Scholar
Globerman, S., and Shapiro, D. M.. “The Impact of Government Policies on Foreign Direct Investment: The Canadian Experience.” Journal of International Business Studies, 30 (1999), 513–532.Google Scholar
Greene, W. H. Econometric Analysis, 7th ed. New York: Pearson Education Limited (2012).Google Scholar
Griffith, R., and Macartney, G.. “Employment Protection Legislation, Multinational Firms, and Innovation.” Review of Economics and Statistics, 96 (2014), 135–150.Google Scholar
Gu, L. “Product Market Competition, R&D Investment, and Stock Returns.” Journal of Financial Economics, 119 (2016), 441–455.Google Scholar
Guimaraes, P.; Figueiredo, O.; and Woodward, D.. “Industrial Location Modeling: Extending the Random Utility Framework.” Journal of Regional Science, 44 (2004), 1–20.Google Scholar
Hart, O. D. “The Market Mechanism as an Incentive Scheme.” Bell Journal of Economics, 14 (1983), 366–382.Google Scholar
Haufler, A., and Stahler, F.. “Tax Competition in a Simple Model with Heterogeneous Firms: How Larger Markets Reduce Profit Taxes.” International Economic Review, 54 (2013), 665–692.Google Scholar
Hausman, J. A. “Specification Tests in Econometrics.” Econometrica: Journal of the Econometric Society, (1978), 1251–1271.Google Scholar
Head, K.; Ries, J.; and Swenson, D.. “Agglomeration Benefits and Location Choice: Evidence from Japanese Manufacturing Investments in the United States.” Journal of International Economics, 38 (1995), 223–247.Google Scholar
Helpman, E. “Trade, FDI, and the Organization of Firms.” Journal of Economic Literature, 44 (2006), 589–630.Google Scholar
Helpman, E.; Melitz, M. J.; and Yeaple, S. R.. “Export Versus FDI with Heterogeneous Firms.” American Economic Review, 94 (2004), 300–316.Google Scholar
Henisz, W. J. “The Institutional Environment for Multinational Investment.” Journal of Law, Economics, and Organization, 16 (2000), 334–364.Google Scholar
Hoberg, G., and Phillips, G.. “Text-Based Network Industries and Endogenous Product Differentiation.” Journal of Political Economy, 124 (2016), 1423–1465.Google Scholar
Hoberg, G.; Phillips, G.; and Prabhala, N.. “Product Market Threats, Payouts, and Financial Flexibility.” Journal of Finance, 69 (2014), 293–324.Google Scholar
Hombert, J.; Schoar, A.; Sraer, D.; and Thesmar, D.. “Can Unemployment Insurance Spur Entrepreneurial Activity?” Journal of Finance, 75 (2020). 1247–1285.Google Scholar
Hou, K., and Robinson, D. T.. “Industry Concentration and Average Stock Returns.” Journal of Finance, 61 (2006), 1927–1956.Google Scholar
Huson, M. R.; Malatesta, P. H.; and Parrino, R.. “Managerial Succession and Firm Performance.” Journal of Financial Economics, 74 (2004), 237–275.Google Scholar
Irvine, P. J., and Pontiff, J.. “Idiosyncratic Return Volatility, Cash Flows, and Product Market Competition.” Review of Financial Studies, 22 (2008), 1149–1177.Google Scholar
Janeba, E. “Attracting FDI in a Politically Risky World.” International Economic Review, 43 (2002), 1127–1155.Google Scholar
Karabarbounis, L., and Neiman, B.. “Accounting for Factorless Income.” NBER Macroeconomics Annual, 33 (2019), 167–228.Google Scholar
Kesternich, I., and Schnitzer, M.. “Who is Afraid of Political Risk? Multinational Firms and their Choice of Capital Structure.” Journal of International Economics, 82 (2010), 208–218.Google Scholar
Khalilzadeh-Shirazi, J. “Market Structure and Price-Cost Margins in United Kingdom Manufacturing Industries.” Review of Economics and Statistics, 56 (1974), 67–76.Google Scholar
Kleibergen, F., and Paap, R.. “Generalized Reduced Rank Tests Using the Singular Value Decomposition.” Journal of Econometrics, 133 (2006), 97–126.Google Scholar
Krautheim, S., and Schmidt-Eisenlohr, T.. “Heterogeneous Firms, Profit Shifting FDI and International Tax Competition.” Journal of Public Economics, 95 (2011), 122–133.Google Scholar
Laeven, L. “Does Financial Liberalization Reduce Financing Constraints?” Financial Management, 32 (2003), 5–34.Google Scholar
Lang, L.; Ofek, E.; and Stulz, R.. “Leverage, Investment, and Firm Growth.” Journal of Financial Economics, 40 (1996), 3–29.Google Scholar
Li, M.; Lu, Y.; and Phillips, G. M.. “CEOs and the Product Market: When are Powerful CEOs Beneficial?” Journal of Financial and Quantitative Analysis, 54 (2019), 2295–2326.Google Scholar
Li, S., and Zhan, X.. “Product Market Threats and Stock Crash Risk.” Management Science, 65 (2019), 4011–4031.Google Scholar
Lin, L.; Mihov, A.; Sanz, L.; and Stoyanova, D.. “Property Rights Institutions, Foreign Investment, and the Valuation of Multinational Firms.” Journal of Financial Economics, 134 (2019), 214–235.Google Scholar
Lommerud, K. E.; Meland, F.; and Sørgard, L.. “Unionised Oligopoly, Trade Liberalisation and Location Choice.” Economic Journal, 113 (2003), 782–800.Google Scholar
Markusen, J. R. Multinational Firms and the Theory of International Trade, Vol. 1. Cambridge, MA: The MIT Press (2004).Google Scholar
Markusen, J. R., and Venables, A. J.. “Multinational Firms and the New Trade Theory.” Journal of International Economics, 46 (1998), 183–203.Google Scholar
McFadden, D. “Conditional Logit Analysis of Qualitative Choice Behavior.” In Frontiers in Econometrics, Chap. 4, Zaremka, P., ed. New York: Academic Press (1974).Google Scholar
McGowan, D. “Digging Deep to Compete: Vertical Integration, Product Market Competition and Prices.” Journal of Industrial Economics, 65 (2017), 683–718.Google Scholar
Morck, R., and Yeung, B.. “Why Investors Value Multinationality.” Journal of Business, 64 (1991), 165–187.Google Scholar
Morellec, E., and Zhdanov, A.. “Product Market Competition and Option Prices.” Review of Financial Studies, 32 (2019), 4353–4386.Google Scholar
Nachum, L.; Zaheer, S.; and Gross, S.. “Does it Matter Where Countries are? Proximity to Knowledge, Markets and Resources, and MNE Location Choices.” Management Science, 54 (2008), 1252–1265.Google Scholar
Navaretti, G. B.; Castellani, D.; and Disdier, A.-C.. “How does Investing in Cheap Labmy Countries Affect Performance at Home? Firm-Level Evidence from France and Italy.” Oxford Economic Papers, 62 (2010), 234–260.Google Scholar
Nickell, S. J. “Competition and Corporate Performance.” Journal of Political Economy, 104 (1996), 724–746.Google Scholar
Nielsen, B. B.; Asmussen, C. G.; and Weatherall, C. D.. “The Location Choice of Foreign Direct Investments: Empirical Evidence and Methodological Challenges.” Journal of World Business, 52 (2017), 62–82.Google Scholar
Noorbakhsh, F.; Paloni, A.; and Youssef, A.. “Human Capital and FDI Inflows to Developing Countries: New Empirical Evidence.” World Development, 29 (2001), 1593–1610.Google Scholar
Oetzel, J. M, and Oh, C. H.. “Learning to Carry the Cat by the Tail: Firm Experience, Disasters, and Multinational Subsidiary Entry and Expansion.” Organization Science, 25 (2014), 732–756.Google Scholar
Raith, M. “Competition, Risk, and Managerial Incentives.” American Economic Review, 93 (2003), 1425–1436.Google Scholar
Rivoli, P., and Salorio, E.. “Foreign Direct Investment and Investment Under Uncertainty.” Journal of International Business Studies, 27 (1996), 335–357.Google Scholar
Roychowdhury, S. “Earnings Management Through Real Activities Manipulation.” Journal of Accounting and Economics, 42 (2006), 335–370.Google Scholar
Scharfstein, D. “Product-Market Competition and Managerial Slack.” RAND Journal of Economics, 19 (1988), 147–155.Google Scholar
Schmidt, K. M. “Managerial Incentives and Product Market Competition.” Review of Economic Studies, 64 (1997), 191–213.Google Scholar
Siedschlag, I.; Smith, D.; Turcu, C.; and Zhang, X.. “What Determines the Location Choice of R&D Activities by Multinational Firms?” Research Policy, 42 (2013), 1420–1430.Google Scholar
Silva, J. A., and Leichenko, R. M.. “Regional Income Inequality and International Trade.” Economic Geography, 80 (2004), 261–286.Google Scholar
Tomiura, E. “Foreign Outsourcing, Exporting, and FDI: A Productivity Comparison at the Firm Level.” Journal of International Economics, 72 (2007), 113–127.Google Scholar
Turco, A. L, and Maggioni, D.. “On the Role of Imports in Enhancing Manufacturing Exports.” World Economy, 36 (2013), 93–120.Google Scholar
Valta, P. “Competition and the Cost of Debt.” Journal of Financial Economics, 105 (2012), 661–682.Google Scholar
Vannoorenberghe, G. “International Trade, Risk Taking and Welfare.” Journal of International Economics, 92 (2014), 363–374.Google Scholar
Wheeler, D., and Mody, A.. “International Investment Location Decisions: The Case of U.S. Firms.” Journal of International Economics, 33 (1992), 57–76.Google Scholar
Xu, J. “Profitability and Capital Structure: Evidence from Import Penetration.” Journal of Financial Economics, 106 (2012), 427–446.Google Scholar
Yeaple, S. R. “Firm Heterogeneity and the Structure of U.S. Multinational Activity.” Journal of International Economics, 78 (2009), 206–215.Google Scholar
Zaheer, S. “Overcoming the Liability of Foreignness.” Academy of Management Journal, 38 (1995), 341–363.Google Scholar
Supplementary material: PDF

Loncan supplementary material

Loncan supplementary material
Download Loncan supplementary material(PDF)
PDF 155 KB