Competitive Shocks Research Articles

Foreign Competition and Domestic Innovation: Evidence from US Patents

Manufacturing accounts for more than three-quarters of US corporate patents. The competitive shock to this sector emanating from China’s economic ascent could in theory either augment or stifle US innovation. Using three decades of US patents matched to corporate owners, we quantify how foreign competition affects domestic innovation. Rising import exposure intensifies competitive pressure, reducing sales, profitability, and R&D expenditure at US firms. Accounting for confounding sectoral patenting trends, we find that US patent production declines in sectors facing greater import competition. This adverse effect is larger among initially less profitable and less capital-intensive firms. (JEL F14, L11, L60, O19, O31, O34, P33)

Exposure of belt and road economies to China trade shocks

This paper uses international trade data to assess the degree of exposure of Belt and Road economies to China trade shocks. It finds that the growth of China's trade following its internal transformation and accession to the WTO significantly impacted the export performance of Belt and Road economies in the period 2000-2015. The increase in China's imports significantly boosted the exports of these economies. However, this effect was attenuated by increased competition from China in export markets. The effects of China's demand shocks were stronger in more upstream industries, while those of competition shocks were stronger in industries that produce goods that are closer to final use. The effects of competition shocks were also relatively stronger in countries that are relatively poorer and geographically closer to China. Building on these findings, the paper documents the current degree of exposure of Belt and Road economies to China trade shocks.

Effects of customer industry competition on suppliers: Evidence from product market competition shocks

Abstract We examine the effect of increased customer industry competition on relationships with suppliers, using exogenous variation in industry-level tariffs. We find that customers facing significant tariff reductions increase output by increasing product purchases and maintaining longer relationship durations with existing suppliers. These results are concentrated in strategically important suppliers such as those that have stronger prior relationship ties to customers and among those suppliers that are financially constrained due to capacity constraints among suppliers. However, customers who increase purchases from financially constrained suppliers perform poorly in the post-tariff reduction period. Overall, our results indicate that an increase in customer industry competition improves suppliers’ bargaining power and has both intended and unintended consequences for customers’ trading relationships and future performance.

Product Market Competition and the Value of Diversification

I examine how industry concentration affects the value of diversification and explore the strategic value of agency problems for conglomerates that operate mainly in concentrated industries (concentrated conglomerates). I find that concentrated conglomerates have higher diversification values. Consistent with agency theories, agency problems, on average, cause greater diversification discount. In contrast, agency problems in concentrated conglomerates create strategic advantage and lead to higher valuations consistent with the notion that these conglomerates can credibly commit to their industries. Using tariff reductions as competitive shocks, I show that concentrated conglomerates experience significant valuation decline and respond aggressively to threats in less-competitive industries.

Firm Response to Competitive Shocks: Evidence from China’s Minimum Wage Policy

Abstract The large regional variation in minimum wage levels during the period 2002–8 in China implies that Chinese manufacturing firms experienced competitive shocks as a function of firm location and their low-wage employment share. We find that minimum wage hikes accelerate the input substitution from labour to capital, reduce employment growth and accelerate total factor productivity growth—particularly among the less productive firms under private Chinese or foreign ownership, but not among state-owned enterprises. The heterogeneous firm response to labour cost shocks can be explained by differences in management practices and suggests that management quality and competitive pressure are complementary.

Heterogeneous Effects of Chinese Import Competition on Chilean Manufacturing Plants

We study the effect of a trade-induced competitive shock, defined as rising import competition from China, on Chilean manufacturing plants. For identification, we exploit the fact that in 1995–2006, Chinese import penetration increased sharply in Chile, but this expansion varied widely across manufacturing industries. We use Chinese export growth in high-income industry-country pairs as an instrument for Chinese import penetration. Our results suggest that plants in more exposed industries exhibit relative declines in revenue, employment, and physical capital and face a higher probability of exiting the panel than comparable plants in less exposed industries. All these effects are concentrated among establishments with low initial levels of productivity.

Environmental Policy Instrument Choice and International Trade

We develop a dynamic stochastic general equilibrium model to understand how environmental policy instrument choice affects trade. We extend the existing literature by employing an open economy model to evaluate three environmental policy instruments: cap-and-trade, pollution taxes, and an emissions intensity standard in the face of two types of exogenous shocks. We calibrate the model to Canadian data and simulate productivity and import price shocks. We evaluate the evolution of key macroeconomic variables, including the trade balance in response to the shocks under each policy instrument. Our findings for the evolution of output and emissions under a productivity shock are consistent with previous closed economy models. Our open economy framework allows us to find that a cap-and-trade policy dampens the international trade effects of the business cycle relative to an emissions tax or intensity standard. Under an import shock, pollution taxes and intensity targets are as effective as cap-and-trade policies in reducing variance in consumption and employment. The cap-and-trade policy limits the intensity of the import competition shock suggesting that particular policy instrument might serve as a barrier to trade.

Product market competition and productivity shocks

ABSTRACTI investigate the interaction effects of competition and productivity shocks on stocks’ earnings and returns. I find that the sensitivities of earnings and returns to productivity shocks are negatively associated with competition intensity. I also find that the excess returns of productivity shocks-sorted portfolios are lower when competition intensity is high, even after controlling for known return predictors. Overall, the empirical evidence shows firms are less exposed to productivity shocks when competition is high. As such, this study provides a possible mechanism through which the structure of product markets affects stock returns.

Foreign Competition and Domestic Innovation: Evidence from U.S. Patents

Manufacturing is the locus of U.S. innovation, accounting for more than three quarters of U.S. corporate patents. The rise of import competition from China has represented a major competitive shock to the sector, which in theory could benefit or stifle innovation. In this paper we empirically examine how rising import competition from China has affected U.S. innovation. We confront two empirical challenges in assessing the impact. We map all U.S. utility patents granted by March 2013 to firm-level data using a novel internet-based matching algorithm that corrects for a preponderance of false negatives when using firm names alone. And we contend with the fact that patenting is highly concentrated in certain product categories and that this concentration has been shifting over time. Accounting for secular trends in innovative activities, we find that the impact of the change in import exposure on the change in patents produced is strongly negative. It remains so once we add an extensive set of further industry- and firm-level controls. Rising import exposure also reduces global employment, global sales, and global R&D expenditure at the firm level. It would appear that a simple mechanism in which greater foreign competition induces U.S. manufacturing firms to contract their operations along multiple margins of activity goes a long way toward explaining the response of U.S. innovation to the China trade shock.

Import Competition, Heterogeneous Preferences of Managers, and Productivity

When managers have objectives beyond maximizing monetary profits, inefficiencies may arise. An increase in competition may then force managers to improve the productivity of the firm in order to ensure survival. While this hypothesis has received ample theoretical attention, empirical evidence is scarce, mainly because preferences of managers are typically unobserved. In this paper, we exploit the fact that a large literature has documented specific non-monetary preferences of family managers. Using Spanish firm-level data, we compare how family-managed and professionally-managed firms react to import competition shocks. We find that import competition leads to productivity increases in family-managed firms that are initially unproductive. Productivity improvements are driven by family management as opposed to family ownership or non-managing family members. Furthermore, we show that these managers increase efficiency by reducing material usage, which is consistent with them trying to increase their short-term cash flow in order to survive. Finally, productivity improvements seem to be particularly pronounced in multi-generational family firms that also introduce organizational changes.

Chinese competition: intra-industry and intra-firm adaptation

This paper quantifies how a small and open economy adapts and thereby shapes to what extent it is exposed to competition from China on the world market. Starting from granular firm-commodity-destination-level sales data for the universe of Danish manufacturing firms we construct counterfactual competition exposure, measured as sales weighted Chinese import shares in the home and all export markets while holding the industry composition, the product as well as the destination mix constant. Without adaptation the competition shock after China’s WTO accession would have been more than one and a half times of what has been readily observable. Besides broad industry-level structural change, intra-industry reallocations and intra-firm adjustments through product and destination switching are important adaptation channels. Furthermore, we find some evidence for dynamic quality differentiation as a relevant adaptation margin.

What Causes Privatization? Evidence from Import Competition

This paper identifies product market competition as a fundamental impetus for privatization. Based on the economy with the largest state sector and shocks to product market competition caused by its trade liberalization, we explore whether and how competition affects privatization. We find that state-owned enterprises (SOEs) more affected by the competitive shocks are more responsive to introduce private ownership and more likely to render the state’s controlling positions. Responses are stronger when SOEs operate in industries with greater technology and efficiency/productivity gap from frontier economies or operate with excess employment and costs in regions with larger fiscal burdens. We further explore the role of oversight governments and find the results stronger among (1) local SOEs supervised by governments at a lower layer of an administrative cohort and (2) central SOEs located farther away from the central government, suggesting that information asymmetries and strategic importance of SOEs are key considerations of the state’s privatization decisions. Finally, we find regions with better market and legal institutions attract private investors and facilitate SOEs’ privatization under competitive pressures.

Trade-induced Competition and Ownership Dynamics

This paper documents a causal effect of trade-induced competition on the ownership dynamics of firms using the largest trade liberalization in China. By exploiting varying degrees of tariff reductions across industries, we find that firms that are more affected by competitive shock experience a larger relative increase in their foreign shareholdings compared to those less affected. We also find a stronger relative effect among firms with a greater demand for external financing and technology, which indicates the strategic role of foreign shareholdings in empowering domestic firms to obtain financing and new technologies in a competitive market.

Is Good Advice Hard to Find?: The Impact of Director Connectedness on Financing and Investment

We explore the effect of director connectedness on firms’ investment and financing activities. Evidence suggests that well-connected directors are more effective advisors, with outside and inside directors often playing different roles. Outside directors have better information regarding external factors such as industry trends, which are important when evaluating investment decisions. During competition shocks, well-connected outside directors have greater influence on investment decisions than inside directors. Outside director connectedness also has a more pronounced effect on a firm’s R&D outcome than inside director connectedness. Connected inside and outside directors have similar positive impacts on the market reaction to acquisition activity, indicating that all well-connected directors are associated with mergers that are perceived to be more valuable. However, well-connected inside directors play a larger role in lowering financing costs when information asymmetry is high.

Competing Against Overconfident CEOs

We examine differences in how overoptimistic and non-overoptimistic CEOs respond and perform when faced with competitive shocks. Using tariff reductions as exogenous shocks to competition and triple difference-in-differences specifications on matched samples, we find that when competition increases, firms with overoptimistic CEOs slash their profit margins and increase research and development and advertising more than non-overoptimistic CEOs do. These firms achieve increased domestic market share and increased value relative to firms led by non-overoptimistic CEOs. Our empirical results support extant theories that predict that CEO overoptimism is beneficial under increased competition.

Does trade liberalization narrow the gender wage gap? The role of sectoral mobility

This paper analyzes the impact of import competition and dynamic labor adjustment on gender outcomes in wages and welfare in the U.S.. I consider a dynamic model of sectoral choice and structurally estimate mobility costs using data from the Current Population Survey and O*NET. A measure of intersectoral distance in task characteristics facilitates the structural estimation of switching costs that vary by gender and across sectors. In a set of trade shock simulations, an import competition shock in the manufacturing sector disproportionately affects male employment and wages. Since manufacturing is male labor intensive and men face higher exit costs from manufacturing, wage and welfare gains from trade are higher for women than men.

Product Market Competition Shocks, Firm Performance, and Forced CEO Turnover

We examine the effect of competition shocks induced by major industry-level tariff cuts on forced CEO turnover. Both the likelihood of forced CEO turnover and its sensitivity to performance increase. These effects are stronger for firms exposed to greater predation risk and with products more similar to those of other firms. CEOs are more likely to be forced out in weak governance firms; however, in good governance firms, CEOs are offered higher incentive pay. New outside CEOs receive higher incentive pay and come from firms with lower cost structures and higher asset sales. Performance and productivity improve after forced turnover.

Does Competition Protect Retail Investors? Role of Financial Advice

The active money management industry has been characterized by both strong competitive pressure from passive investment vehicles and high fees. This paper investigates how the introduction of low-cost index funds affects fund company strategies. The retail mutual fund market is segmented, where unsophisticated investors rely on financial advisers, and sophisticated ones invest directly. Exploiting the staggered entry of low-cost Vanguard index funds as competitive shocks, I show that in response to competition, incumbents sold to self-directed investors reduce their fees by five percent of the mean; however, funds sold with broker recommendations increase their fees by six percent of the mean. The index fund entry also slows the growths of actively managed funds. The responsiveness of broker-sold fund flows to distribution fees increases, suggesting a shift in composition towards less elastic consumers. Further, incumbents increase the degrees of active management. The results illustrate why mutual fund fees decline slowly in the aggregate despite the competition from lower-cost alternatives.

Index Fund Entry and Financial Product Market Competition

The active money management industry is characterized by both strong competitive pressure from passive investment vehicles and high fees. This paper investigates how the introduction of low-cost index funds affects fund company strategies. The retail mutual fund market is segmented, where unsophisticated investors rely on financial advisers and sophisticated ones invest directly. Exploiting the staggered entry of low-cost Vanguard index funds as competitive shocks, I show that, in response to competition, incumbents sold to self-directed investors reduce their fees by 5% of the mean; however, funds sold with broker recommendations increase their fees by 6% of the mean. Index fund entry also slows the growth of actively managed funds. The responsiveness of broker-sold fund flows to distribution fees increases, suggesting a shift in composition toward less elastic consumers. Further, incumbents increase the degree of active management. The results illustrate why mutual fund fees slowly decline in the aggregate despite competition from lower-cost alternatives. This paper was accepted by Gustavo Manso, finance.

Blocked But Not Tackled: Who Founds New Firms When Rivals Dissolve?

Research summary: This article examines the role of competitive shocks in creating opportunities for new firm foundings. I argue that the sudden dissolution of rival firms may release resources that create opportunities for firm formation, particularly among employees facing impediments to capturing value in their current organizations. Analyzing microdata from the legal services industry, I use unexpected deaths of solo-practicing attorneys as quasi-exogenous sources of rival dissolution. Results indicate that these shocks increase the odds of founding by about 30%, with stronger effects among attorneys with weaker social connections or higher competition for promotion. The article thus highlights the role that founders play in reallocating dissolved rivals' resources while demonstrating that founding may be an important outlet for “blocked” employees to capture value from opportunities. Managerial summary: This article finds that the shutdown and dissolution of a rival organization may spur employees to found new firms. As a consequence, managers may find it valuable to pay attention to employees' turnover intentions following the dissolution of a rival. Findings suggest that employees who are having trouble advancing in the firm may be the most likely to found a new organization when a rival dissolves, so managers may want to focus retention efforts on these individuals. To the extent that managers wish to capture customers, employees, and other resources that were formerly attached to a dissolved rival, managers may wish to be aware that they could be in competition with their own employees for these resources and opportunities. Copyright © 2017 John Wiley & Sons, Ltd.