To Acquire or to Ally? Foreign Competition and Firm Boundary

Abstract

ABSTRACT This study examines how foreign competition influences firms’ external growth strategies. Exploiting staggered US import tariff reductions as a quasi‐natural experiment, we find that heightened competition leads firms to expand their use of strategic alliances. This pattern is more pronounced for firms with limited financial or operational flexibility, weaker competitive positions, and firms operating in low‐entry‐barrier industries. Under competitive pressure, firms predominantly form alliances with partners in the same industry, as well as with firms in high‐tech, business‐to‐consumer (B2C), and product‐differentiated sectors. In the long term, alliance‐active firms exhibit higher R&D intensity and patent outputs. Overall, the study highlights how domestic firms reshape their external growth choices, partner selection, and long‐term innovation outcomes in response to global competition shocks.