Market Competition And Enterprise Inventory Investment

Inventory is vital for both macro economy and micro enterprises. On the macro level, it’s meaningful for understanding the business cycle fluctuation to study the characteristics of inventory investment fluctuation and its influences. For enterprises, too much inventory investment will occupy funds and have a negative effect on funds turnover. Also it may generate storage cost and impairment loss. While too less inventory investment may not be able to meet the demand uncertainty in time and thus, loss of profit margins and market share. Risks and opportunities coexist so that it has far-reaching strategic significance for us to understand the behavior of enterprise inventory investment thoroughly.Most existing literatures of inventory investment focus on the macro perspective, like the relationship between inventory investment and business cycle. Our understanding of the micro enterprise’s behavior of inventory investment is insufficient. With the market competition as the breakthrough point, this paper discusses how market competition influences the enterprise inventory investment and its economic consequences, considering different characteristics of industry. Using the sample of Chinese listed companies from third quarter of 2002 to fourth quarter of 2014, empirical results show that enterprise inventory investment is significantly positive with industry concentration and the average gross margin of industry, while it’s negative with the number of companies in an industry. It shows that the more competitive the product market is, enterprises are more likely to reduce inventory investment, especially in those of higher market share, in the growth or recession industries and in the cyclical industries. Furthermore, enterprise who adjusts its inventory investment according to the situation of market competition will significantly has a better business performance in next quarter. Conclusions of this paper not only enrich the understanding of enterprise inventory investment behavior, but also expand the research field of the product market competition and micro enterprise behavior interaction.