Impact of Competition on Innovations of IT Industry: An Empirical Investigation
Forthcoming at Journal of Management Information Systems
33 Pages Posted: 20 Aug 2018 Last revised: 19 Apr 2021
Date Written: August 7, 2018
Innovation and competition are two major pillars in the IT industry. In this paper, we examine the causal relationship between product market competition and innovations in the IT industry. We measure the innovations from both the quantity (number of patents) and the quality (number of non-self citations) perspectives. Based on the Herfindahl-Hirschman Index and natural experiments, we find robust evidence that the competition has a positive effect on the innovations of the IT industry. Specifically, after the exogenous shock to the market (import tariff cuts and thus increased industry competition), the number of patents per IT firm increases by 27.3%, and the number of non-self citations per IT firm increases by 38.2% on average. The effects are more pronounced in the more competitive sectors. Our study highlights the importance of the competition in the IT industry and suggests that the positive effect of competition on innovation in the IT context is likely to be driven by the parallel search effect. Our findings contribute to the recent policy debate and suggest that reducing import barriers may bring important welfare gains through innovations in the IT industry.
Keywords: Product Market Competition, Innovation, Information Technology, Patent, Import Tariff
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