Innovation: The Bright Side of Common Ownership?
41 Pages Posted: 16 Jan 2018 Last revised: 30 Apr 2021
Date Written: March 19, 2021
A firm has inefficiently low incentives to innovate when other firms benefit from its innovative activity and the innovating firm does not capture the full surplus of its innovations. We theoretically show under which conditions common ownership of firms can mitigate this impediment to corporate innovation. Common ownership increases innovation when technological spillovers are sufficiently large relative to product market spillovers. Otherwise, the business-stealing effect of innovation dominates and common ownership reduces innovation. Empirically, product market spillovers (as measured by Jaffe and Mahalanobis distance in product market space) decrease the effect of common ownership on innovation inputs and outputs whereas technology spillovers (distance in patent space) increase the effect. The sign and magnitude of relationship between common ownership and corporate innovation therefore varies considerably across the universe of firms. Our results inform the debate about the welfare effects of increasing common ownership among U.S. corporations.
Keywords: common ownership, competition, innovation, R&D
JEL Classification: O31, L20, L40
Suggested Citation: Suggested Citation