Industry competition and firm innovation: Evidence from China Junhong Yang Management School, University of Sheffield, Conduit Road, Sheffield S10 1FL, United Kingdom Bo Pan Management School, University of Sheffield, Conduit Road, Sheffield S10 1FL, United Kingdom Abstract Using a panel of 291,241 Chinese firms from 1998 to 2007, this study investigates the extent to which industry competition affects firms’ innovation activities in China. We find that firm- level innovation is negatively related to industry competition. The negative relation is stronger in higher external finance dependence (EFD) industries. Further evidence shows that the enhanced negative effect in higher EFD industries is more pronounced for financially constrained firms than financially healthier counterparts. Specifically, competition represents a more inhibiting effect on innovation activities in higher EFD industries for private firms, small firms, young firms, firms with low capacity to pay interest, firms without political affiliation, firms without state shares, firms with high growth opportunities, and firms located in central and western regions. Our results are robust to the use of various specifications and estimation methods. JEL classification: D40; G31; L13; O16; O31; O53 Keywords: Industry competition; Firm’s innovation activities; China; External finance dependence; Financially constrained firms Corresponding author. E-mail address: junhong.yang@sheffield.ac.uk (J. Yang); bpan2@sheffield.ac.uk (B. Pan)