Discretionary Research and Development Investments and Product Market Competitive Threats

The article studies the interlinkage between research and development (R&D) intensity and product market competitive threat (PMC). How PMC influences the R&D intensity is still a debatable issue, and both theoretical and empirical literature are inconclusive. Using a novel text-based dynamic measure of firm-level competitive threats for United States firms, we find a positive relationship between PMC and R&D intensity. The competitive landscape and the nature of R&D investments can differ across various industries and asset classes. In alternative investment sectors such as commodities, real estate, infrastructure, metal and mining (energy), we find this association is positive (negative). We also document how R&D intensity mediates the relationship between the PMC and firm performance. Furthermore, we examine this association under various boundary conditions that may serve as strategic levers to influence this relationship. We offer confirmatory evidence of this positive association by using alternative proxies of R&D intensity, alternative proxies of competition, and endogeneity concerns. In the absence of any stylized fact, this finding has important implications for policymakers and government to incentivise R&D projects and policies intended to alter the competitive climate.