Product Market Competition and the Economic Value of Innovation

Abstract

The economic value of innovation, defined as the expected present value of incremental future cash flow associated with the innovation, is a primary incentive for firms' investment in innovative projects. This paper investigates how product market competition affects the economic gain firms can obtain from innovation. Empirical evidence is lacking because the innovation value is not observable, and the innovation-competition relationship is endogenous. This paper adopts a stock market value based estimate of patent value proposed by Kogan et al. (2017) and a quasi-experiment design to address these empirical challenges. Empirical analyses suggest a negative relationship between market competition and patent value and that a decrease in market competition increases patent value. This paper contributes to the competition-innovation literature by providing causal evidence of how competition affects innovation value from firms' perspectives while previous literature focuses on aggregate technological advancement.