Competition and Innovation Revisited: A Product-Level View

Abstract

We study the effect of competition on firm innovation at the project-level. We instrument shocks to competition in therapeutic areas with the FDA’s breakthrough therapy designation (BTD) event on a therapy. BTD events strongly associate with several indicators of competitive shocks, including announcement returns and increased likelihood of FDA approval to market the drug. BTD shocks discourage rivals’ innovation in that therapeutic area on average. However, the effect varies with ex-ante competitiveness of the therapeutic area, as well as with the rival’s position (leader vs. follower) in that space. We support Aghion et al. (2005) with direct causal evidence at the corporate-project-level.