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Import Penetration and Corporate Misconduct: A Natural Experiment

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Abstract

Corporate misconduct receives significant attention in the business ethics literature. This paper studies how corporate misconduct is impacted by import penetration from China, which is largely exogenous to the U.S. product market. Using this natural experiment, we find that heightened Chinese import penetration curbs corporate misconduct of U.S. firms. The effect is more pronounced for firms with weaker corporate governance and firms more vulnerable to product market competition. The findings provide implications for firms facing increased import penetration. Firms may consider improving corporate governance and exploring avenues for differentiation as potential strategies to cope with the competition. In addition, we address the exogeneity concern derived from the influence of Chinese value penetration. Furthermore, we find that competition-related policies such as tariff reduction and U.S. granting China Permanent Normal Trade Relations (PNTR) status also lower corporate misconduct. Our work adds to the debates on competition and corporate misconduct in a cross-country competitive landscape.

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Notes

  1. While past works have used various other measures to quantify market competition (Dupire & M’Zali, 2018; Xu, 2012; Chen et al., 2021; Valta, 2012), import penetration is becoming increasingly recognized and used as an exogenous measure of competition (Acemoglu et al., 2016; Autor et al., 2013; Lie and Yang, 2023).

  2. Canada has a close institutional system to the United States. Japan shares similar informal institutions as China.

  3. A group of studies investigate the negative impacts of competition on firms’ financial stability and competitive positions (Acemoglu et al., 2016; Amiti and Heise, 2021; Autor et al., 2013; Xu, 2012). Another strand of works shows positive governance actions firms take in order to cope with the competition (Xu, 2012; Atawnah et al., 2021; Huang et al., 2017; Dupire & M’Zali, 2018). However, there is no empirical analysis regarding the direct connection between competition and corporate misconduct behavior.

  4. Our work also contributes beyond the corporate governance channel. While there are current studies focusing on the relationship between import penetration and corporate governance (Atawnah et al., 2023), our study provides a multifaceted perspective that import penetration and its associated externalities, encompassing corporate governance, social engagement, and product innovation differentiation, are collectively more complex than corporate governance alone in terms of their role in reducing misconduct. Moreover, our study considers various contextual factors, such as economic conditions, cultural influences, and market dynamics, which further enrich our understanding of how import penetration influences corporate behavior. We believe that our work provides a vital contribution by expanding the import competition–corporate governance argumentation into a comprehensive understanding of import competition and corporate misconduct within the field of business ethics.

  5. For example, the research sample of Lie and Yang (2023) is 1992–2005.

  6. Our sample starts at 2001 because it was the year that China joined the World Trade Organization (WTO) and subsequently established Permanent Normal Trade Relations (PNTR) with the United States. This occurrence can be seen as an external shock that leads to significant increases in import penetration. Our sample ends in 2016 for several reasons. First, it is the latest trade information by UN Comtrade at the time this research is conducted. Second, secondly and more importantly, after 2016, there may be various confounding factors that influencing both import policies and corporate misconduct. Some of these confounding factors include the United States’s trade war with China in 2018 and the COVID-19 shock to the global economy that took place since 2020. For example, COVID-19 could lead to weakened import penetration from China because severely disrupted trade patterns or relationships contributed to the economic slowdown of China following the height of the pandemic and the state’s establishment of its Zero COVID policy. At the same time, the outbreak of COVID-19 may be accompanied by decreased misconduct as firms stopped operations, as well as their misconducts. Monitoring agencies may also close offices, thus reducing the misconduct records. If these hypothesized effects took place during pandemic, then the observed relation between import penetration and violations could be biased and not fully capture the governance and differentiation views we proposed in the paper.

  7. To compare our observations with prior import penetration studies, we recreate the study based on a sample period of 1991–2006. We find a very similar sample size (44,726) to the related works (Hombert & Matray, 2018; Lie & Yang, 2017, 2023). Interestingly, in our main study with a more recent sample period of 2001–2016, our observations are smaller (18,462). This is likely to reflect the growing size in firms affected by the foreign competition as Small-size firms may be gradually driven out of the market (Amiti and Heise, 2021). Therefore, we could observe increasing magnitude of imports but fewer firms in each penetrated industry at the same time.

  8. Consistent with Gencer (2021), we aggregate violations across the years to allow for more significant violation observations. This allows us to address several issues. The first issue, as pointed out by Gencer (2021), is the timing issue. For the corporate violation data, the only date available in the data is the penalty date. When matching that with the control variables, it is possible that violations take longer than a year to be detected. As the information is missing for the time it takes from violation to penalty, and some types of violations may take longer time to be detected while others are short, therefore aggregating the measure across several years would be more likely to capture the majority of the violation outcomes. Another issue, as mentioned by Christensen et al. (2017), one year is a relatively short interval over which to measure infrequent outcomes. Using aggregate measures over 2 years or more helps to mitigate the problem of high density of observations at zero.

    Before aggregation, the percentage of firm observations with a positive total violation count is about 8% per year. After aggregation, the percentage value increases to 11%. Our results hold by using violation measures without aggregation.

  9. Past studies mainly use various other measures to evaluate levels of market competition, including the fitted Herfindahl–Hirschman Index, C-4 Index, etc. (Dupire & M’Zali, 2018; Xu, 2012; Chen et al., 2021; Valta, 2012).

  10. While exchange rates only explain a small portion of the variation in import competition, and tariff rates are subject to political influence which could distort loss of sales resultant from import competition, the imports from China measure developed in Acemoglu et al. (2016) and Autor et al. (2013) more directly isolate the effect of improvements in production in China and the role that plays in increasing imports, making it a more exogenous measure (Lie and Yang, 2023).

  11. In an unreported table, we obtain the first-stage regression results of estimating the instrumented import penetration variable [Import Penetration (Instrumented)] using the imports from China to eight other developed countries [Import Penetration (HI)] following Chen et al. (2022). Consistently, we include industry and year fixed effects to mitigate the influences of unobserved variations at industry and year level. The positive and significant coefficient on Import Penetration (HI) suggests the relevancy of the instrumental variable and validity of the first-stage regression.

  12. Thanks to the comment from an anonymous reviewer, we analyze whether the effects of import penetration on misconduct differ for major exporters. In an unreported table, we separately examine industries with below-median and above-median export levels. Our results show no substantial difference in the baseline model for low or high exporting industries.

  13. Our study mainly examines the impact of import penetration on firms in industries directly affected by increased import competition, without delving into the effects on downstream participants. However, we suggest that heightened import competition might have some positive effects for downstream participants, potentially leading to improved products and efficiency due to increased pressure on their suppliers. It is important to note that we do not necessarily expect a significant reduction in misconduct among downstream suppliers, as the competitive dynamics in their specific industry may not change significantly.

  14. Our study utilizes import penetration as a measure of market competition, arguing that international market competition through import penetration provides another level of competition above purely domestic competition within the U.S. marketplace. As a result, we also control for common domestic competition measures added to our baseline model in our Online Appendix and find that our baseline results hold when including these additional controls.

  15. As a note, the sample size of the executive ownership test is higher than that of the baseline model, as we collect data for multiple executives from each firm–year. As a result, for this specific test, there could be multiple observations per firm per year due to the presence of multiple executives from each firm in the dataset.

  16. Our hypothesis explores two channels through which import penetration may influence corporate misconduct: enhanced corporate governance and differentiation via corporate social responsibility (CSR) or innovation. Although our tests directly address corporate governance and product differentiation, respectively, they do not explicitly examine the potential improvements in CSR attributable to import penetration. To fill this gap, we direct readers to our Online Appendix, where we present empirical evidence demonstrating that import penetration positively affects firms' environmental, social, and governance (ESG) and CSR strategy scores. This supplementary analysis underscores our argument that increased competitive pressure from import penetration encourages firms to adopt stronger CSR practices as part of their differentiation strategy.

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Acknowledgements

Special thanks to Asli Ascioglu for serving in the reviewing committee for this thesis. The authors are grateful for comments from Kee-Hong Bae, Sadok El Ghoul, Omrane Guedhami, and participants at the Bryant University Research Seminar, Academy of International Business Meeting, Academy of Management Meeting, and Financial Management Association Meeting. The remaining errors are the sole responsibility of the authors.

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  1. Department of Finance, College of Business, Bryant University, 1150 Douglas Pike, Smithfield, RI, 02917, USA

    Christopher Dupuis & Ying Zheng

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  1. Christopher Dupuis
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Christopher Dupuis (cdupuis2@bryant.edu) is a student at Bryant University and he carries out the work for his honors thesis. Order of authorship is alphabetical and does not reflect the relative contribution of each author.

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Correspondence to Ying Zheng.

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Dupuis, C., Zheng, Y. Import Penetration and Corporate Misconduct: A Natural Experiment. J Bus Ethics (2024). https://doi.org/10.1007/s10551-024-05654-7

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