Does Creative Destruction Matter in Competitive Industries?

Abstract

We find that the positive impact of a firm’ own innovations on its own growth is similar in more and less competitive industries. In contrast, the negative impact of rival firms’ innovations on a firm’s growth (creative destruction) is significantly stronger in less competitive industries, especially for firms with less independent existing board. Creative destruction improves subsequent board independence and interrupts the quiet life of managers more in less competitive industries. Difference-in-differences tests using major tariff cuts show that our results are unlikely due to endogeneity. Overall, creative destruction improves resource reallocation and efficiency when there is inadequate competition.