Competition and the Value of Innovation

Abstract

I investigate how competition affects the economic value of innovation, the primary incentive for corporate R&D investments. I measure the economic value of innovation based on the changes in patenting firms' stock market value around patent issuance dates, following (Kogan et al. 2017). The economic value of innovation is higher in industries with a low level of competition. Within an industry, firms at the technological frontier or those that have relatively high pricing power enjoy higher economic returns from patents. I use a quasi-natural experimental design to compare the value of patents issued immediately before and after competition-altering events. Using horizontal M&A announcements as anti-competitive events, I show that an expected decrease in market competition leads to an increase in patent value.

Keywords: Competition, Innovation, Patent Value, R&D

JEL Classification: D40, G32, G34, O31