Pre-Emptive Investment Behaviour and Industry Structure

Models of strategic investment behaviour show that an incumbent firm by making pre-emptive capital investments may restrict the entrant's size and increase its market share, or deter entry and limit the number of firms in the industry. The existing empirical literature on testing strategic investment models offers inconclusive evidence. This paper takes a different approach and focuses on the incentives of pre-emptive investments and shows that upward and downward adjustment costs of capital will be important determinants of the desirability and credibility of pre-emptive investments. This in turn posits a link between the upward and downward adjustment costs and industry structure as measured by concentration and the number of firms. While the empirical analysis is best viewed as suggestive and offering an alternative approach to examining strategic investment behaviour, the empirical results, based on a large sample of US manufacturing industries, reveals evidence in favour of such a relationship.