Competition Laws and Corporate Innovation

By: Ross Levine, Chen Lin, Lai Wei & Wensi Xie (Oxford Business Law Blog)

Does competition increase or decrease innovation? Many researchers stress that more intense competition discourages innovation by shrinking profits. Why spend money on innovation if other firms quickly develop products that compete away the profits. Other research, however, emphasizes that more intense competition encourages innovation by making markets more contestable: to get any profits in a highly contested market, currently dominant and other firms need to innovate to stay head, or get ahead, even if it is only for a short time period. Since quantifying the impact of competition on innovation has implications for antitrust policies, an enormous empirical literature assesses the competition-innovation nexus. 

Two key empirical challenges, however, have plagued past research on this central question. First, common proxies for competition, such as firm size and industry concentration, might not accurately measure the contestability of markets. Second, many studies use patents to measure innovation, but firms may choose to patent or not patent an innovation based on the expected benefits of the legal protection offered by the patent relative to the expected costs of disseminating detailed information about the innovation via the patent to competitors. Thus, firms might increase or decrease patents based on changes in these strategic cost-benefit calculations, not because of changes in actual innovation. 

In a recent paper, ‘Competition Laws and Corporate Innovation,’ we make three contributions that help address these challenges and offer new results concerning the impact of competition on innovation. First, we create two unique datasets on patenting. The firm-level dataset has information on each firm’s patents and financial accounts, across 66 countries, from 1991 through 2015. Using this new dataset with over 1.2 million firm-year observations, we construct measures of the number, impact, and explorative nature of corporate patents. The second dataset includes country-industry information on patenting in 186 countries from 1888 through 2015. With our unique data, we provide the first examination of the relation between competition and patenting in a large, international panel of private and public firms.