Increased Competitors’ Presence and Speed of Abandoning Large-scale Investments in Emerging Markets

Abstract

Taking the competitive dynamics approach, we study firms’ exit in response to the threat of entry or expansion in the presence of sunk costs. We define firms’ exit when firms abandon ongoing major investment projects. Due to their more limited access to financial, brand-related, technological and managerial resources, we argue that domestic firms are weaker than are foreign firms when facing increased presence by competitors. Specifically, domestic firms will exit faster when facing threats of increased presence by both domestic and foreign firms, while foreign firms only exit faster when facing increased presence by other foreign firms. However, due to the liability of foreignness the increased presence by foreign firms is more likely to lead to faster exit for both foreign and domestic firms when it happens as an extension of existing production capacity as compared to de novo entry. Finally, due to labor market dynamics, we posit that investments by foreign rivals within the same geographical cluster matters only for the speed of exit of domestic firms, not for the time to exit of foreign firms. Using survival model on a panel dataset of 3,325 investments in India from 1995 to 2015, we find overall support for our expectations.