Do Firm Boundaries Matter? The Impact of Chinese Imports on US Conglomerates

Abstract

Earlier studies show that Chinese imports in the U.S. markets have increased significantly subsequent to China’s World Trade Organization (WTO) accession in 2001. This study uses the China’s WTO accession as a quasi-natural experiment to examine whether conglomeration affects firms’ ability to respond to a significant increase in competitive pressure. Theories suggest that conglomerate segments may outperform single-segment firms if the headquarters allocate resources to the segments through internal capital markets. On the other hand, conglomerate segments may underperform if the headquarters drain resources out of the segments. Empirical analyses show that conglomerate segments have higher sales growth and higher profitability than single-segment firms when they face intensified import competition. Given the relatively fixed market size, the results suggest that conglomerate segments gain market shares over single-segment firms. Additional analyses show that conglomerates’ outperformance is not observed when the markets in which segments operate already have high product market competition. The results indicate that the headquarters engage in winner-picking and support only those segments that are expected to perform well in the future. Overall, conglomeration encourages competitiveness, and internal resources are allocated to relatively competitive segments.