Competition and invention quality: Evidence from Swiss firms

Abstract Existing literature investigates the effect of access to international markets on the technological activities of companies neglecting the issue of competition. It is not only the access to such markets, but in particular the competition in these markets that drives technological activities. This partly explains the divergent findings in the literature. We try to fill this research gap by investigating the relationship between competition in international technological markets, invention quality, and firm performance. We compile a unique time-series cross-section dataset combining patent and survey data covering the period 1990–2013. The survey data are based on stratified random sample of about 6000 companies drawn from the census data provided by the Swiss Federal Statistical Office. This data allows us to develop composite indicators for competition and invention quality, giving credit to their versatile features. We apply econometric procedures using international trade shocks as an instrument to identify invention quality and address selection issues with a Bayesian imputation approach. We find evidence that the positive effect of invention quality on domestic sales of innovative products is positively mediated by intensive competition in international markets. This has important implications for trade policy and underscores the meaningfulness of open markets for invention quality.