The impact of foreign competition on domestic firms' product quality: Evidence from a quasi‐natural experiment in the United States

Abstract Researchers have investigated various factors that explain the variation in product quality across firms, but little is known about how competition from companies located in other countries may affect domestic firms' product quality. Although such foreign competition has received much attention from news media and the public, especially during the recent United States (US)–China trade war, its impact on product quality is still unclear. Our research answers this important question by conducting a quasi‐natural experiment in the US, in which significant reductions in import tariff rates represent an exogenous increase in foreign competition for US firms. Performing a difference‐in‐differences estimation of the difference in product quality changes between treatment and control firms, our research shows that increased foreign competition has a negative impact on the product quality of the US firms concerned. However, such a negative impact is less significant for firms with high levels of operational slack and R&D intensity. Firms pursuing product differentiation rather than cost leadership strategies are also less affected by foreign competition. Overall, our research demonstrates foreign competition's negative impact on product quality and highlights the crucial role that firms' operational resources and strategies play in mitigating the negative impact.