Market Concentration and Innovation Horizon: Evidence from the US Firms

Abstract

This paper investigates the correlation between market concentration, measuring the intensity of competition in an industry, with various innovation strategies used by companies such as short-term and long-term. A dataset comprising an unbalanced panel of U.S based firms was used in this study. To develop robust and valid conclusions, the analysis contains a combination of statistical and econometric tools such as regression analysis, multicollinearity diagnostics, endogeneity tests, as well as comprehensive robustness checks. These tools are employed to examine the dependence between innovation horizon, defined as time taken between investments in research & development activities and the eventual realization of innovation in form patent applications, and market concentration which is quantified as Herfindahl-Hirschman Index. Also, irrespective of model specifications selected for testing among various modelling scenarios, these robustness analyses substantiate the reasonableness of research findings and thus empirically proves significant linkage of higher market concentration with smaller innovation horizon. The results suggest that companies operating in highly concentrated markets tend to give preference to short-run innovation policies, which is probably caused by the extremely competitive environment, characterized by limited number of entities competing aggressively to enhance or retain their market share, in which these organizations operate. These insights contribute and enhance the extent to which market structure determines the strategic timing of innovation among firms, hence, yielding important implications for both innovation policy and managerial decision-making.