The effect of foreign competition on product switching activities: A firm level analysis

Pressure from foreign competition on the decision to introduce new products or on production costs may influence firms to particpate in product switching activities. Firms switch products if they either add or drop products within their product range. I test whether pressure from foreign competition is likely to influence firms that concurrently add and drop (churn) products rather than firms that i) do not undertake any product switching activity, ii) add products only, or iii) drop products only. Firms pay substantial fixed costs to switch products and their productivity levels are likely to determine such ability. I consider whether firms that invest in research and development activities and export their final products are likely to churn products as they are able to generate greater productivity levels than firms that undertake either one of the two activities. As firms constrained by the lack of adequately educated workers may have workers who cannot adapt to different set of skills necessary for product switching activities, I consider whether such firms are likely to churn products as they are exposed to pressure from foreign competition in comparison to firms not constrained by the lack of adequately educated workers. In addition, the contract-intensive nature of an industry can also dictate whether firms exposed to foreign competition can churn products as they may be constrained due to their contract obligations with their buyers and suppliers. The results indicate that pressure from foreign competition is likely to influence the decision of firms to churn products rather than add products only or undertake neither product switching activities. There is little evidence that firms facing pressure from foreign competition will churn products rather than drop products only, except for the most productive firms that invest in research and development activities and export participation.