How do Private Sector Firms Respond to a Reduction in Competition from the Public Sector?

Abstract

This study advances the strategy and international business (IB) literature on grand challenges by examining how private sector firms may respond to a reduction in competition from the public sector. Our analysis exploits an unexpected suspension of production licenses of the vaccine-manufacturing public sector units in India as an exogenous source of reduction in competition for the private sector firms. Although the suspension presented a window of opportunity for private sector firms to address unmet market demand, it was laden with uncertainty and was widely challenged due to its threat to vaccine self-sufficiency of the country. Despite the uncertainty, we find that the suspension of production licenses of the public sector units was associated with performance gains of private sector firms in the Indian vaccines market with the gains driven largely by new product introductions. Interestingly, domestic firms gained significantly from this window of opportunity, but foreign firms did not gain as much. Further analysis reveals evidence of market entry, driven by domestic firms who entered the market in greater numbers and at a faster speed, compared to foreign firms. Finally, we find that the heterogeneity between domestic and foreign firms responses remained persistent even after the revocation of the PSUs supply suspension. Taken together, the study findings show that even a transitory and uncertain window of opportunity, arising from a sudden reduction in competition from the public sector, can lead to a persistent restructuring of the market via new product introductions and market entry by private sector firms operating in related markets.