How Do MNEs and Domestic Firms Respond Locally to a Global Demand Shock? Evidence from a Pandemic

Abstract

Global shocks bring unanticipated changes in the business environment of foreign multinational enterprises (MNEs) and rival domestic firms. We examine whether there is a difference between how MNEs and domestic firms react in heterogeneous local or subnational markets to a global demand shock. Leveraging the 2009–2010 H1N1 influenza pandemic as a source of exogenous variation in global demand for influenza vaccines, we investigate the role of subnational heterogeneity in economic resources, industry infrastructure, and political alignment within an emerging economy on the behavior of incumbent MNEs and rival domestic firms. We find that following the pandemic, MNE market share in the influenza vaccine market relative to the noninfluenza vaccine markets declines more in regions with lower government health spending per capita and also, in regions unaligned with the federal government. Additional analyses suggest that these changes in market share are not caused by a reduction in MNE revenues. Rather, they are caused by domestic firms that were already present in noninfluenza vaccine markets diversifying by entering the highly related influenza vaccine market. Finally, a granular examination of the differential responses reveals that such responses are not related to preshock differences in regional coverage of MNEs and domestic firms. This study contributes to the extant literature by suggesting that the direct costs or opportunity costs of new market and region entry are relatively greater for MNEs than for domestic firms, particularly in regions that have inadequate health infrastructure and are politically not aligned. This paper was accepted by Joshua Gans, business strategy. Funding: The authors acknowledge funding support from the National University of Singapore [Start-up Research Grant R-313-000-143-133]; the University of Minnesota [Summer Research Grant]; the Industrial Credit and Investment Corporation of India Bank Chair at Indian Institute of Management Ahmedabad; and the Campbell and Teller National Fellow Program at Hoover Institution, Stanford University. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2022.4313 .