Escaping Product Market Rivalry Through Innovation

This study leverages advanced text-analysis techniques to investigate how increased product market rivalry, induced by Chinese import competition, affects innovation among incumbent U.S. firms in the electronic and electrical appliance industry. We measure the similarity between the product descriptions of U.S. firms and those of Chinese importers, thus capturing firm-level competitive pressure. Employing a continuous difference-in-differences framework, we compare innovation outcomes of U.S. firms more directly competing with Chinese importers to those facing lower competitive pressure over a five-year period before and after initial Chinese market entry. We find that incumbent U.S. firms significantly increase their quality-weighted patent production, create more new-product patents, and strategically diversify into new technological and business segments when confronted with heightened competition. Our findings highlight the role of import-driven rivalry in stimulating strategic innovation and illustrate how text-based similarity measures can effectively quantify firm-level competition, providing novel methodological tools for strategy scholars. This paper was accepted by Maria Guadalupe, business strategy. Funding: B. Cassiman acknowledges financial support from the Fonds Wetenschappelijk Onderzoek [Grants G010324N and G071417N]. D. Wehrheim acknowledges financial support from Grant Ref. PID2024-155952NB-I00, funded by MCIN/AEI/10.13039/501100011033 and by ESF+, ERDF “A way of making Europe”, European Union. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.08304 .