Models of competition for the market with endogenous market structures show that, contrary to the Arrow view, an endogenous entry threat induces the average firm to invest less in R&D and the incumbent leader to invest more. We test these predictions using a unique dataset for the German manufacturing sector (the Mannheim Innovation Panel). In line with our predictions, endogenous entry threats as perceived by the firms (in survey data) reduce R&D intensity for an average firm, but they increase it for an incumbent leader. These results hold after a number of robustness tests with instrumental variable regressions.