Competition favors the prepared firm: Firms’ R&D responses to competitive market pressure |
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| Authors: | Chang-Yang Lee |
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| Institution: | KAIST Business School, KAIST (Korea Advanced Institute of Science and Technology), 207-43 Cheongryangri, Dongdaemun, Seoul, 130-868, Republic of Korea |
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| Abstract: | This paper aims to contribute to the literature on the long-debated relationship between market competition and firm research and development (R&D) by investigating the effect of competitive market pressure on firms’ incentives to invest in R&D. The paper shows that a firm's R&D response to competitive market pressure depends primarily on its level of technological competence or R&D productivity: firms with high levels of technological competence tend to respond aggressively (i.e., exhibit a higher level of R&D efforts) to intensifying competitive market pressure, while firms with low levels of technological competence tend to respond submissively (i.e., exhibit a lower level of R&D efforts). The differential effect of competitive market pressure on firm R&D, conditioned primarily by the level of firms’ technological competence, is empirically supported by unique firm-level data from the World Bank. Furthermore, the role of firm-specific technological competence in conditioning the R&D-competition relationship is more evident and statistically more significant for firms facing consumers whose utility is relatively more elastic to product quality than to price. |
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| Keywords: | L25 O31 |
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