We explore how the threat of entry influences the innovation activity of an incumbent. We show that the incumbent’s investment is hump-shaped in the entry threat. When the entry threat is small and increases, the incumbent invests more to deter entry, or to make it unlikely. This is due to the entry deterrence effect. However, when the threat becomes huge, entry can no longer profitably be deterred or made unlikely and the investment becomes small. Then the Schumpeterian effect dominates. These results turn out to be very robust. Even though innovations are central to growth, the question whether more competition or a higher threat of entry leads to greater R&D investments is not settled. While we do not try to answer this general question, we seek to explore the more specific question how the threat of entry influences an incumbent’s investments in R&D. We build a simple model that captures two important but counteracting effects. First, a Schumpeterian effect. A larger entry threat reduces the incumbent’s expected profit and therefore also its investment. Second, an entry deterrence effect. 1 To deter entry, or to make entry unlikely, a greater threat requires a larger investment.