Product market competition and corporate investment: Evidence from China

- Hypothesis: investment and competition are positively related in high-growth environments.
- Firms invest more when in an industry, province, or country with higher growth rates.
- Firms that invest more under high competition experience better firm performance.
- Firms with predation risk invest more when competition is high in a growing economy.
- The relation between competition and investment is stronger for industry leaders.
- Firms in industries that experience a large reduction in import tariff rates invest more.

We find a positive relation between product market competition and corporate investment using a sample of Chinese manufacturing firms during 1999-2010. A quasi-natural experiment and change regressions yield consistent evidence. We postulate that China's high and predictable growth rate, as it transitions from a developing economy to a developed economy, is what drives the positive relation between competition and investment. We directly test and provide support for this growth-oriented explanation. We also find that high investment under high competition is a value-enhancing proposition for firms. Finally, we test whether some firm types are more likely to invest under high competition in a growing economy, and we find that firms with high predation risk and firms that are industry leaders invest more.