Abstract
Using Hoberg, Phillips and Prabhala’s (2014) product market fluidity to capture competitive threats, we find that firms with high product market threats will invest more in R&D and generate higher number of patents and patent citations. In addition, this positive effect of competitive threats on innovation is more pronounced for firms with smaller market shares or in more competitive industries. We also document that investing more in innovation helps competition-threatened firms increase their market power in the future. Overall, our results suggest that product market threats create incentives for firms to innovate to “escape” competitive pressure.
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