Demand-side incentives, competition, and firms’ innovative activities: Evidence from automobile industry in China

The shift to new energy vehicles (NEVs) is attracting growing attention because of the many externalities of fossil fuel transportation. Although many supportive policies have been enacted to promote NEVs, little is known about the changes of innovative behaviors of vehicle manufacturers confronting increased localized market size and competition. Using the exogenous variation provided by a promotion program for NEVs across cities in China, this paper investigates the causal effect of demand-side incentives in the local market on firms' innovative outputs. The staggered difference-in-differences model shows that, for vehicle manufacturers located in demonstration cities, the number of patent applications increased by 17.91-18.80, with a large increase in both inventions and utility models. We then confirm the role of demand stimulated by these incentives. Moreover, we find that firms in cities with greater competition in the local market filed more patents and did not sacrifice patent quality. These findings shed light on the impact of local market size on innovations in a highly competitive market.