“Globalization and Firm Refocusing” by Runjuan LIU
University of Toronto
When a firm produces a single product, its best response to import competition is to reduce output and even shut down. However, many firms produce multiple products that are related to one another via various cost and demand complementarities. Thus, import competition directed at one product has implications for a firm’s entire product mix. Drawing upon insights from the concept of ‘core competency’ (e.g., Aghion and Tirole, 1995), I consider two ways in which import competition affects multi-product firms. (i) In response to rising core-product imports, the firm will protect the core by shifting resources from the periphery to the core. This will lead the firm to contract its peripheral products and expand its core products. (ii) In contrast, rising peripheral-product imports will lead to a conventional response i.e., to the firm shedding its peripheral products. rnrnrnrnUsing Compustat data for more than 1,000 firms over the period 1984-1996, I find striking support for these implications. First, a rise in imports of core products leads to a contraction of periphery products and an expansion of core products as measured by sales, sales growth, and exit probabilities. Second, the weaker the complementarities that a peripheral product shares with the core (as measured by the extent of joint production, joint purchases of inputs, and joint sales to buyers), the more likely is the peripheral product to be divested in response to import competition. These facts point clearly to the need for distinguishing between single-product and multi-product firms when examining the impacts of import competition.