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No 1046:
How Does Corporate Investment Respond to Increased Entry Threat?

Philip Valta () and Laurent Frésard ()

Abstract: The authors use large reductions of import tariffs to examine how incumbent firms modify investment when the threat of entry by foreign rivals intensifies. Incumbents reduce investment by 7.2% of capital in response to higher entry threat. This effect is robust, pervasive, and likely causal. Consistent with predictions of strategic investment models, the investment reduction concentrates in markets where competitive actions are strategic substitutes, where deterring entry is costly, and where investment makes incumbents look soft. Moreover, firms only reduce tangible investment which comprises commitment value, but do not reduce intangible investment. The authors' results provide novel evidence on how and why market structures and strategic interactions influence corporate investment.

Keywords: Corporate investment; Entry Threat; Tariff Reduction; Strategic Interactions; (follow links to similar papers)

JEL-Codes: G15; G31; G34; (follow links to similar papers)

52 pages, December 17, 2014

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