Market Competition and Corporate Innovation Relation: An Explanation from Mergers and Acquisitions

Abstract

We revisit the relation between market competition and innovation, which was first discussed in Schumpeter (1943). Using patents, citations and R&D as measures for innovation, and more recent metric for market competition, we document a decreasing relationship between competition and innovation outputs, and increasing relationship between competition and R&D expenditures. Importantly, we provide evidence that firm’s takeover activities could help explain the linear relations. Our empirical results indicate that generally there’s a decline of newly patents rollout in the post-merger period across firms. But the magnitude of decline in patenting activity varies with firms of different market concentrations: firms located in more competitive market experience steeper drop while the decrement is moderate among firms in more concentrated market. We argue that the innovative incentives by firms with low market power are disrupted by takeovers, and these firms decelerate their novel projects after major acquisitions.