The purpose of this study is to examine firms' response to product market threats from foreign competitors, specifically whether they pursue a strategy of dispersion or herding with regards to their product space and executive-incentive plans.
This study applies a two-stage least squares instrumental variable (IV) approach to address endogeneity concerns. The analyses apply to a sample of 9,719 firm-pairs from 21 manufacturing industries over the period from 2006 to 2015.
Firms attempt to distance themselves from their fellow incumbent firms when facing greater foreign competition, specifically with regards to their product descriptions and the incentives they provide to CEOs. This effect becomes stronger when industry peers are more likely to serve as material threats themselves.
These results provide encouraging opportunities for future research about the long-run implications of dispersion in local industries. The survival rate tied to the observed strategies in this study, as well as general changes to industry structure are remaining questions of interest.
The observed responses by incumbent firms in this study offer insights for policymakers on tariff-setting, as tariff adjustments may influence the local product space. Additionally, the related shifts in CEO incentives inform shareholders' contracting decisions.
This study reveals that incumbents’ responses to foreign competition reshape local industry product spaces. Furthermore, this study sheds light on a new link between firms’ product spaces and management incentives.
