Foreign Rivals Are Coming to Town: Responding to the Threat of Foreign Multinational Entry

Abstract

How do domestic firms respond to the threat of foreign competition? This paper quantifies foreign competition threats by exploiting news of potential multinational investments from over 35,000 media outlets around the world. Using firm–specific measures of foreign competition threat, the analysis shows that domestic firms respond by upgrading productivity, raising innovation, and altering product composition. However, there is a U–shape relationship between initial productivity and productivity growth where the right and left tails upgrade productivity through innovation and product dropping, respectively. These responses constitute an economically important source of gains and convey new implications for the timing of economic policies. (JEL D24, F23, L25, L82, O30)