New research has charted the way US businesses adapted to market shocks caused by reductions in import tariffs and increased foreign competition, with greater innovation emerging as a longer-term benefit.
Co-authored by Dr Chenjian Zhang from The University of Western Australia Business School and published in the Journal of Business Finance and Accounting, the research studied the response of 1,127 US manufacturing firms to staggered reductions in US import tariffs between 1990 and 2020.
Dr Zhang said globalisation and trade liberalisation had produced competitive shocks that altered market dynamics and intensified foreign competition.
“Changes in tariff policy have implications far beyond trade flows, reshaping competitive pressures and influencing how businesses grow, collaborate and innovate,” Dr Zhang said.
“How domestic firms respond strategically to these changes has important ramifications for their survival and long-term success.”
The study examined how US businesses adjusted their partnerships and acquisition strategies when faced with greater foreign competition following substantial reductions in US import tariffs, many of which reflected implementation of the North American Free Trade Agreement (NAFTA) in 1994.
Most of the tariff cuts in the research sample occurred in 1995, with others in years including 1992, 1997, 2004 and 2008. The cuts increased competitive pressure and prompted US firms to rethink their external growth strategies, including how they could increase their market power, capabilities and consumer reach.
The study found domestic firms shifted towards collaboration over conquest, seeking out new alliances rather than stepping up acquisitions.
“We found businesses under increased threat from foreign competition were more likely to expand their strategic alliances, while acquisition activity remained broadly unchanged,” Dr Zhang said.
“The decision to pursue alliances over expensive acquisitions was particularly pronounced in firms with less financial or operational room to move or which were at a competitive disadvantage, and in industries with lower barriers to entry."
Dr Zhang said alliances offered incumbents a more cost-effective and flexible mode of expansion than acquisition – and were associated with stronger subsequent innovation.
“Strategic alliances, whether with companies in the same industry or in high-tech, business-to-consumer or product-differentiated sectors, allow businesses to share risk, access new technologies and pool knowledge and resources,” he said.
“In our study these partnerships were associated with higher subsequent research and development intensity and patent output, with companies that formed alliances in response to competitive pressure going on to demonstrate stronger innovation performance.
“This highlights collaboration as a useful way for businesses to adapt more quickly to changing market conditions and helps policymakers understand the broader consequences of tariff changes.”
The study was a collaboration between UWA and the University of Bath, Durham University and University of Bristol in the United Kingdom.