The Effect of Foreign Competition on Related Diversification and Performance

Abstract

This study examines whether foreign competition affects related diversification. To obtain exogenous variation in product market competition, I exploit a quasi-natural experiment provided by large currency appreciation that occurred between 2005 and 2010 in the manufacturing sector of commodity-exporting countries. This paper examines the impact of a significant real appreciation of the Colombian Peso in the 2000s at the product-firm level. A currency appreciation shock affects a firm through two different channels: (1) Firms adjust their product portfolio by reducing sales and dropping products affected by an appreciation shock; (2) firms are more likely to add products when they have higher levels of relatedness to the core products under competitive pressure. These findings provide the first evidence on how foreign competition affect corporate diversification at the product level.