Abstract
This paper examines the interplay between globalization, product market competition, and corporate investment. We find that imports and foreign direct investment adversely affect domestic firms’ market power, but the effect of imports is more pronounced. We also find that firms with larger losses in market power cut their capital expenditures more when their market power is stronger. Internal funds and market power show a complementary effect on corporate investment. Also, the sensitivity of investment to cash flow declines more when the impact of import competition on firms’ market power increases. Overall, our results suggest that advances in globalization contribute to changes in the structure of the product markets, and firms react by adjusting their investments decisions.
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