Import Competition and Domestic Bankruptcy; The Impact of Industry Structure

Abstract

Business is becoming increasingly more international. From a narrow, domestic perspective, increasing internationalization is not always appreciated. Trade deficits and declining domestic industries are often attributed to foreign competition.

Import competition fundamentally differs from domestic competition in several ways. Imports induce an additional stress on domestic units as foreign producers compete with domestic units for resources in the domestic market. This research views the impact of foreign competition from two perspectives--the Selection perspective and the Adaptation perspective.

In the Selection perspective, the relationship between import competition and domestic bankruptcy is hypothesized to be moderated by the structural characteristics of the industry. Literature from Industrial Organization and International Economics is used to identify four system characteristics. They are capital intensity, advertising intensity, R & D intensity, and the level of competition.

In the Adaptation perspective, it is proposed that though bankruptcy is a negative outcome at the firm level, at the industry level it may be construed as a positive outcome. The weeding out of inefficient units frees critical resources and offers the opportunity for their redeployment into more fruitful avenues.

A time-series and cross-sectional design was used to empirically investigate the hypothesized relationships. Data were collected for a sample of 32 U.S. manufacturing industries over a period of 11 years, from 1972-1982.