Abstract
This paper develops a simple framework for investigating the variation in firms' investment behavior across industrial sectors and over time. We divide the economy into three tiers: major industrial sectors, businesses, and firms, and focus on the impact of business-level interaction on firms investment behavior. After controlling for unobservable firm-specific effects, business-specific effects, and a changing economic environment, we find that the investment and profitability of competitors help explain variations in investment across firms in major Japanese industrial sectors.
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