We explore how firms respond to downstream product shocks. We find that affected firms increase research and development and make additional safety-related upstream investments. These investments vary with firm capabilities and across shock severity. Competitors appear to vicariously learn and also engage in similar upstream investments in affected markets. 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 upstream investments are related to a decrease in the intensity and rate of future downstream product shocks. Surprisingly, however, these upstream investments appear to have limited impact on mitigating the negative demand response caused by these shocks.
Contact person: Marina Chugunova
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