Input sourcing, trade liberalization, and diversifying mergers

摘要

We show that a firm’s expertise in managing specific inputs—its core competence—is a key driver of diversifying mergers. While prior work shows that such capabilities drive organic, within-firm product expansion, we demonstrate that they also motivate firms’ inorganic growth through acquisition of external firms. Using China’s 2001 WTO accession as a natural experiment, we find that a reduction in tariffs on common inputs of two industries significantly increases the likelihood of a diversifying merger between these two industries. The effect is concentrated in differentiated and innovation-intensive inputs, indicating that the valuable capability lies in mastering complex, knowledge-intensive inputs rather than in sourcing generic ones. The main result holds in a global sample covering 71 economies. Our findings extend the core competence theory by highlighting how input-related capabilities shape firm boundaries across industries.