Don't Throw the Baby Out With the Bathwater : Firm Response to Downstream Product Shocks

We explore how firms respond to downstream product shocks. We find that affected firms increase R&D and make additional safety-related investments in their existing assets-in-place. These investments vary with firm capabilities and across shock severity. Competitors appear to vicariously learn and also engage in similar upstream investments. We present evidence that these upstream investments have important performance implications. First, these investments are positively related to transition probabilities and approval rates for products that received them. Second, these investments are related to a decrease in the intensity and rate of future downstream product shocks. Surprisingly, however, these investments appear to have limited impact on mitigating the negative demand response caused by these shocks