Time to Give Up? The Speed of Abandoning Large-scale Investments in an Emerging Market: The Role of Increased Presence by Competitors

Taking the competitive dynamics approach we study the issue of firms’ exit in response to the threat of entry or expansion in the presence of sunk costs. We scrutinize this issue by analyzing investment project abandonment. We study when firms abandon ongoing projects in response to investments by rivals that are either domestic or foreign. Due to their access to financial, brand-related, technological and managerial resources, we argue that domestic firms are weaker than are foreign firms when facing increased presence by competitors, and are hence exit faster due to the threat. This implies that domestic firms exit faster when they face threats of increased presence by both domestic and foreign firms, while foreign firms only exit faster in the face of increased presence by other foreign firms. However, due to the liability of foreignness the increased presence by foreign firms is more likely to lead to faster exit for both foreign and domestic firms when it happens as an extension of existing production capacity as compared to de novo entry. Finally, due to labor market dynamics, we posit that investments by foreign rivals within the same geographical cluster matters only for the speed of exit of domestic firms, not for the time to exit of foreign firms. Using survival model on a panel dataset of 3,325 investment projects in India from 1995 to 2015, we find overall support for our ideas.