Competition and R&D Financing: Evidence from the Biopharmaceutical Industry∗

What is the interaction between competition, R&D investments, and the financing choices of R&D-intensive firms? Motivated by existing theories, we hypothesize that as competition increases, R&D-intensive firms will: (1) increase R&D investment relative to assets-in-place that support existing products; (2) carry more cash; and (3) maintain less net debt. We provide causal evidence supporting these hypotheses by exploiting differences between the biopharma industry and other industries, as well as heterogeneity within the biopharma industry, in response to an exogenous change in competition. We also explore how these changes affect innovative output, and provide novel evidence that in response to greater competition, companies increasingly “focus” their efforts—there is a relative decline in the total number of innovations, but an increase in the economic value of these innovations.