Qing Hu, Wenjing Li, Chen Lin, Lai Wei

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This study examines how trade-induced competition affects firms’ ownership dynamics, using China’s accession to the World Trade Organization as a major trade liberalization event. The findings suggest that firms experiencing greater competitive shocks tend to increase their foreign ownership relative to those less affected, highlighting the strategic role of foreign shareholders in enhancing firms' competitiveness. Moreover, this effect is more pronounced among firms with higher capital and technology demands, indicating that firms may leverage foreign shareholders for access to financing and technological advancements to cope with market pressure.

Corporate ownership structure plays a crucial role in governance, financing, investment, and innovation. However, existing research largely focuses on static ownership characteristics, with limited studies examining its dynamic changes, particularly in response to market competition. With globalization and trade liberalization intensifying competition, firms must adjust their structures to remain competitive. This study utilizes detailed panel data on Chinese manufacturing firms to track changes in ownership structures and employs a difference-in-differences approach to identify the causal effects of trade competition on ownership adjustments.

Theoretically, firms facing intensified competition might increase state ownership to secure financial support or policy advantages. However, the findings reveal that firms experiencing trade shocks do not significantly increase state ownership but rather tend to introduce foreign shareholders. Foreign investors not only enhance corporate governance but also facilitate technology transfers, improve productivity, and ease financial constraints. Further analysis shows that this trend is more pronounced in economically developed regions with better market institutions. Additionally, firms in industries lagging in technology or heavily reliant on external financing are more likely to increase foreign ownership, suggesting that foreign investors strengthen firms' competitiveness primarily through technology adoption and financial support.

This study contributes to the understanding of ownership structure determinants by emphasizing the role of market competition in shaping ownership dynamics. It also expands the literature on foreign ownership by revealing how trade liberalization influences foreign investors’ entry decisions. Furthermore, the findings have practical implications for firms’ strategic adjustments, particularly in an era of evolving global trade dynamics and heightened market competition, providing empirical insights on how firms can optimize their ownership structures to enhance competitiveness.