Shutdown versus M&A: An empirical investigation of Slovenian incumbent firms' responses to foreign competition

- The paper matches different foreign firm entry modes with incumbents response reactions.
- Foreign firm entry triggers stronger reallocation than domestic firm entry.
- Foreign firm entry increases the relative probability of incumbents shutdown.
- Local firms tend to react by merging only in the case of a greenfield FDI entry mode.
- Foreign firms are less likely to be an M&A target but tend to close down more easily.

The paper investigates the shutdown and merger responses of heterogeneous incumbent firms to increased foreign competition. Foreign firm entry is confirmed to be significantly tougher than domestic firm entry in terms of its reallocation forces. Accounting for the competing nature of shutdown and merger risk, the results for Slovenian manufacturing firms during the later stage of Slovenia's transition show that the entry of foreign firms via either FDI or exports increases the relative probability of incumbents deciding to shut down, while the incentive to react by merging is present only when foreign firms enter via a greenfield investment within the same region. While a shutdown decision is detected as the principal response in case of import competition, no predominance can be identified in incumbents' reactions to FDI entry. Furthermore, firms with foreign owner(s) proved less likely to be a target of takeovers/mergers, although they tend to close down more easily than locally owned rivals.