Does competition stimulate R&D investment? Insights from antitrust law

This study examines the impact of changes in market equilibrium, from collusion to competition, on firms’ R&D investments by leveraging the staggered enactment of antitrust legislation in 32 countries, which effectively addresses endogeneity concerns in the innovation literature. We argue and find that restoring competition by dissolving collusion requires increased R&D investment by firms to effectively compete for market share. The effect is stronger among firms operating in more concentrated industries before the reform and among those with greater financial flexibility and higher risks. Increased R&D investment is associated with improvements in both return on equity and Tobin’s Q, indicating real and market performance gains. These effects are amplified in countries with a stronger rule of law and a weaker pre-reform innovation capacity. Overall, the findings highlight the role of antitrust enforcement in fostering innovation and firm performance through the restoration of competitive market structures.