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The Effects of Entry on Incumbent Innovation and Productivity

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Author Info
Philippe Aghion (Harvard University and Institute for Fiscal Studies (IFS))
Richard Blundell (University College London and IFS)
Rachel Griffith (University College London and IFS)
Peter Howitt (Brown University)
Susanne Prantl (Wissenschaftszentrum Berlin and IFS)

Additional information is available for the following registered author(s):

Abstract

How does firm entry affect innovation incentives in incumbent firms? Microdata suggest that there is heterogeneity across industries. Specifically, incumbent productivity growth and patenting is positively correlated with lagged greenfield foreign firm entry in technologically advanced industries, but not in laggard industries. In this paper we provide evidence that these correlations arise from a causal effect predicted by Schumpeterian growth theory-the threat of technologically advanced entry spurs innovation incentives in sectors close to the technology frontier, where successful innovation allows incumbents to survive the threat, but discourages innovation in laggard sectors, where the threat reduces incumbents' expected rents from innovating. We find that the empirical patterns hold using rich micro panel data for the United Kingdom. We control for the endogeneity of entry by exploiting major European and U.K. policy reforms, and allow for endogeneity of additional factors. We complement the analysis for foreign entry with evidence for domestic entry and entry through imports. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 91 (2009)
Issue (Month): 1 (October)
Pages: 20-32
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Handle: RePEc:tpr:restat:v:91:y:2009:i:1:p:20-32

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  1. Ville Kaitila, 2007. "Free Trade between the EU and Russia - Sectoral Effects and Impacts on Northwest Russia," Discussion Papers 1087, The Research Institute of the Finnish Economy. [Downloadable!]
  2. Susanne Prantl & Alexandra Spitz-Oener, 2009. "How does entry regulation influence entry into selfemployment and occupational mobility?," Discussion Papers 267, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
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  3. Naomi Griffin & Kazuhiko Odaki, 2009. "Reallocation and productivity growth in Japan: revisiting the lost decade of the 1990s," Journal of Productivity Analysis, Springer, vol. 31(2), pages 125-136, April. [Downloadable!] (restricted)
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  5. Giammario Impullitti, 2008. "International Competition and U.S. R&D Subsidies: A Quantitative Welfare Analysis," Economics Working Papers ECO2008/11, European University Institute. [Downloadable!]
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  6. Runli Xie, 2009. "Trade-Off Between Consumption Growth and Inequality: Theory and Evidence for Germany," SFB 649 Discussion Papers SFB649DP2009-034, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
  7. Amit Khandelwal, 2009. "The Long and Short (of) Quality Ladders," NBER Working Papers 15178, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Priit Vahter, 2006. "Productivity in Estonian enterprises: the role of innovation and competition," Bank of Estonia Working Papers 2006-07, Bank of Estonia, revised 11 Dec 2006. [Downloadable!]
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  10. Ayyagari, Meghana & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2007. "Firm innovation in emerging markets : the roles of governance and finance," Policy Research Working Paper Series 4157, The World Bank. [Downloadable!]
  11. Da Rin, M. & Di Giacomo, M. & Sembenelli, A., 2008. "Firm Entry Dynamics and Taxation of Corporate Profits: Evidence from Europe," Discussion Paper 2008-65, Tilburg University, Center for Economic Research. [Downloadable!]
  12. Schivardi, Fabiano & Viviano, Eliana, 2008. "Entry Barriers in Retail Trade," CEPR Discussion Papers 6637, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  13. Fabiano Schivardi & Eliana Viviano, 2007. "Entry barriers in Italian retail trade," Temi di discussione (Economic working papers) 616, Bank of Italy, Economic Research Department. [Downloadable!]
  14. Volker Grossmann & Thomas Steger, 2007. "Anti-Competitive Conduct, In-House R&D, and Growth," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  15. Thierry Tressel, 2008. "Does Technological Diffusion Explain Australia's Productivity Performance?," IMF Working Papers 08/4, International Monetary Fund. [Downloadable!]
  16. Fernandes, Ana M. & Paunov, Caroline, 2009. "Does tougher import competition foster product quality upgrading ?," Policy Research Working Paper Series 4894, The World Bank. [Downloadable!]
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