Research summary This article investigates how diversified firms reallocate internal non‐scale free resources when one of their product business units (BUs) experiences increased exposure to international competition driven by a sharp decrease in trade tariffs. On average, firms tend to fight, by reallocating resources toward the BU affected by the trade shock and away from other BUs within the same firm. Two variables moderate this first‐order effect with opposite signs. The level of sunk costs of the assets allocated to the BU affected by the shock is a positive moderator of resource reallocation to it. The presence of technological synergies between the BU affected and the rest of BUs instead moderates the relationship negatively. This negative moderation seems to only take place when competition increases the value of technology as a competitive resource. Managerial summary An important question in the strategic decision‐making process of diversified firms is how to react to competitive threats that affect one business unit but not the others. Should managers allocate more resources to the affected business or should they instead reduce their commitment and use the same resources in the remaining operating sectors? In this article, we examine firms’ reallocation decisions following increases in foreign competition due to import tariff cuts. Our results show that firms tend to allocate more resources to the business affected by the tariff cut and less to the businesses unaffected. Furthermore, we find evidence that this behavior is positively associated with performance.

Research Summary Do firms respond to tougher competition by searching for completely new technological solutions (exploration), or do they work to defend their position by improving current technologies (exploitation)? Considering the different times to fruition for exploration versus exploitation, in the presence of heightened competition, we argue that firms might not be able to wait for the benefits of technological exploration to materialize. With a panel data set of U.S. manufacturing firms, we show that tougher competition, due to import penetration, leads to a decrease in technological exploration and an increase in technological exploitation. These effects are heterogeneous across industries, firms, and time. To obtain exogenous variation in competition we rely on both instrumental variable regressions and a difference‐in‐differences design exploiting large changes in import tariffs. Managerial Summary A firm's R&D strategy is one of the fundamental determinants of success or failure when responding to competitive threats. In this study, we examine how firms change the knowledge sources used in their R&D efforts in response to substantial increases in import penetration in their domestic market. We find that in the years that immediately follow an increase in import penetration, firms tend to rely more on familiar knowledge in the development of innovations and less on knowledge sources that were not previously used. This switch in R&D strategy also appears to be temporary (reversed in later years), and it is positively associated with an increased likelihood of survival.

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