Competition and Corporate Decisions

Abstract

How do companies make decisions in a competitive landscape? We explore this question through two lenses: firm boundary expansion and corporate ESG performance. First, using the staggered reductions in U.S. import tariffs as a plausible exogenous increase in foreign competition, we investigate how product market competition affects firms’ choices of external growth between acquisitions and alliances. Our results show that incumbents respond to competitive shocks by prioritizing alliances over acquisitions. This effect is more pronounced among firms with financial or operational inflexibility, supporting the view that alliances are a lower-cost and more flexible alternative to acquisitions. Additionally, we find that this effect is stronger when firms are less protected by barriers to entry or in a weaker competitive position. Further analysis shows that incumbents tend to ally with partners in the same industry, high-tech industries, B2C industries, or highly differentiated industries. Firms opting for alliances experience substantial improvements in R&D intensity and patents granted over the long term. Second, contrary to the view that firms may adopt ESG differentiation strategies to deal with product market competition, we provide novel evidence that a firm’s competitive pressure, measured by product market fluidity, is negatively associated with its ESG performance. Consistent with firms under competitive pressure facing a trade-off between ESG and other investment needs, this negative relationship is more pronounced among firms with financial constraints and in capital-intensive industries. We also find that product market fluidity matters more for costly ESG activities as well as firms with shorter investor horizon. To obtain a quasi-exogenous variation in competitive pressure, we use China import shock and find that increasing exposure to Chinese import competition is associated with a reduction in corporate ESG scores. This negative effect of import competition on ESG performance is more pronounced among firms that are less exposed to domestic competition, i.e., product market fluidity. Furthermore, local public attitudes toward climate change moderate the effect of competitive pressure. Overall, our findings shed light on whether and how product market competition motivates managers to make tradeoffs when setting firm boundaries and adjusting ESG strategies.

Date of Award	26 Jun 2024
Original language	English
Awarding Institution	University of Bath
Supervisor	Hanwen Sun (Supervisor) & David Newton (Supervisor)