The Bright Side of Product Market Threats: The Case of Innovation

Abstract

This paper examines the effects of predatory strategies from rivals on firm innovation. Using Hoberg, Phillips and Prabhala’s (2014) product market fluidity to capture competitive threats from rivals, we find that firms with high product market threats invest more in R&D and generate higher number of patents and patent citations. Using shifts in import tariffs as a quasi-natural experiment to detect the exogenous shocks to competition, we show that firms with high competitive threats tend to be more innovative following the shocks. We further document that the effects of product market threats on innovation are more pronounced for firms with smaller market shares or firms in more competitive industries. Overall, our results are consistent with the hypothesis that product market threats create incentives for firms to innovate to “escape competition.”