Propensity to patent, R&D and market competition : dynamic spillovers of innovation leaders and followers

Dynamic interactions among stock return, Research and Development (R&D) expenses, patent applications based on R&D investment, and the propensity to patent are studied in this work for a panel of firms from the United States. The panel includes technologically similar firms, neck-to-neck, mostly from the drugs product-market sector. Firms’ propensity to patent is modeled by a dynamic latent-factor patent count data model that separates patented and non patented R&D. Patent innovation leader and follower firms are identified according to their knowledge stock. Significant and positive dynamic spillover effects are obtained among patent application leaders and followers. We observe that neck-to-neck firms in patent innovation activity produce an inverted-U relationship between market competition and innovation. Furthermore, firms’ propensity to patent is positively correlated with market competition and there is a positive feedback in both directions. Increasing the degree of competition in the market enhances innovation and patent applications, in order to help firms to appropriate part of the benefits of their R&D investments. On the other hand, firms by increasing their patent applications defend themselves from competitors, trying to improve their market share. However, due to the diffusion of knowledge through patent applications, knowledge spills over to competitors therefore, the degree of competition and innovation increases in the market.