Do U.S. Firms Innovate to Escape Neck-and-Neck Competition?

Abstract

Yes, when product-market competition is measured explicitly by a firm’s neck-and-neckness with its competitive rivals. Using an identification strategy where major reductions in U.S. import tariffs act as exogenous shocks to competition, we show that these shocks differentially incentivized U.S. manufacturing firms to escape competition. Firms facing more neck-and-neck competition generated more patents and patent citations. They took an exploitative strategy in innovation and pursued higher-valued innovation. Difference-in-differences tests further reveal explicit channels in which the escape-competition effect occurs: it occurs among firms that had high potential for product differentiation, faced high product market threats, and adopted conservative financial policies.