Competitive Pressure on the Rate and Scope of Innovation

43 Pages Posted: 23 Apr 2018 Last revised: 18 Jul 2019

See all articles by Kenneth A. Younge

Kenneth A. Younge

Ecole Polytechnique Fédérale de Lausanne

Tony Tong

University of Colorado at Boulder

Date Written: March 30, 2018

Abstract

While executives play an important role in leading firm innovation, they may economize on efforts to innovate when protected from takeover threat. Middle managers may curtail the rate and scope of innovation when executives are expected to reduce their innovation involvement. We test our prediction by exploiting a natural experiment in Delaware where court rulings increased takeover protection for Delaware firms. Difference-in-differences estimates show that increased takeover protection reduced the rate of innovation by firms, and that it also reduced the scope of innovation across several key dimensions (technological, temporal, organizational, and international). Consistent with our argument, we find that the negative effect of takeover protection on innovation was weaker for larger firms, where innovation decision making authority is more likely to be delegated to middle managers and executive involvement is lower. Finally, we examine the substitutive relationship between competitive pressures from the takeover market and the product market, and find that the negative effect of takeover protection on innovation was stronger for firms facing low competitive pressure from the product market.

Keywords: Competitive pressure, innovation, M&A, takeover, organization, hierarchy, incentive, patents

Suggested Citation

Younge, Kenneth A. and Tong, Tony, Competitive Pressure on the Rate and Scope of Innovation (March 30, 2018). Journal of Economic Behavior and Organization, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3156198 or http://dx.doi.org/10.2139/ssrn.3156198

Kenneth A. Younge (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

Station 5
1015 Lausanne
Switzerland

Tony Tong

University of Colorado at Boulder ( email )

1070 Edinboro Drive
Boulder, CO 80309
United States

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