Product-market competition, corporate governance and innovation: evidence on US-listed firms

The debate on competition and innovation has produced a wide range of theoretical and empirical findings. Recently, corporate governance quality has emerged as an additional factor that may complement or substitute for competition’s effect on innovation. We aim to contribute to the debate by investigating whether product-market competition and corporate governance quality affect firm-level innovation, utilising a dataset for 1,400 non-financial US-listed companies. Using two-way cluster-robust estimation, we report several findings. First, the relationship between industry-level competition and input as well as output measures of innovation is non-linear. Secondly, the non-linear relationship is of an inverted-U shape with respect to input measures of innovation, but the relationship has a U-shape when output measure of innovation is estimated. Third, corporate governance indicators such as anti-takeover defences and insider control tend to have a negative effect on input measures of innovation but their effect is positive with respect to the output measure. Finally, when interacted with market concentration, anti-takeover defences and insider control emerge as substitutes, leading to sign reversals in the relationship between competition and innovation. The results are obtained by using two-way cluster-robust estimation that controls for dependence within company/year and industry/year clusters, but they are robust to different estimation methods including fixed-effect and Fama-Macbeth procedure.