Friday, April 22, 2016
Market Competition and Corporate Innovation Relationship: An Explanation from Mergers and Acquisitions
Chong Chen, City University of Hong Kong (CityUHK) examines Market Competition and Corporate Innovation Relationship: An Explanation from Mergers and Acquisitions.
ABSTRACT: We revisit the relationship between market competition and innovation, which was first discussed in Schumpeter (1943). Using patents, citations and R&D as measures for innovation, and more recent measure for market competition, we document an increasing relationship between competition and innovation. Importantly, we provide evidence that firm’s takeover activities could help explain the linear relationships. Our empirical results indicate that generally there’s a declination of newly patents rollout in the post-merger period across firms. But the magnitude of declination in patenting activity varies with firms of different market concentrations: firms located in more concentrated market experience steeper drop while the decline is moderate among firms in less concentrated markets. We argue that firms of high market power are adept at expanding their patent portfolios through acquisitions and they decelerate their patenting activities after major takeovers.