Abstract
This paper exploits the introduction of China's Fair Competition Review System in 2016 as a quasi-natural experiment to analyze the impact of changes in market competition on firm innovation. Our findings illustrate that heightened competition fosters innovation at the firm level. After the implementation of the Fair Competition Review System, monopolistic firms face enhanced financing constraints and reduced free cash flows, while their degree of financialization is also curbed. Furthermore, the management's emphasis on innovation strengthens the motivational effect of competition on innovation. The results from heterogeneity analysis suggest that the Fair Competition Review System's stimulating effect on innovation is especially salient for state-owned enterprise, non-high-tech enterprises, large firms, and those located in regions with lower levels of marketization.
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