Trade-induced competition and ownership dynamics

Abstract

This paper documents a causal effect of trade-induced competition on firms’ ownership dynamics using the largest trade liberalization China has experienced, its accession to the World Trade Organization. By exploiting varying degrees of tariff reductions across industries, we find that firms that are more affected by competitive shocks experience a larger relative increase in their foreign ownership compared with those less affected. In addition, we find a stronger (weaker) effect for firms with a greater (lesser) demand for external financing and technology, which indicates the strategic role of foreign shareholders in empowering domestic firms to obtain financing and new technologies in a competitive market.