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Service-sector competition, innovation and R&D

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Abstract

The central prediction of the Aghion et al. (2005) model is an inverted U-shaped relation between innovation and competition. The model is built on the assumption of a product market and has not yet been empirically tested on service-sector firms. Using detailed firm-level data, we find the inverse U-shaped relation to hold for both small and large service-sector firms. However, non-exporting service firms deviate from the overall pattern. A more detailed breakdown of innovation expenditures shows that the inverse U-shaped pattern holds for both intramural R&D and training, but not for extramural R&D. Finally, as competition increases, small firms tend to seek more strategic alliances with competitors while large firms tend to decrease their collaboration with competitors. To some extent, the behavior of large firms can be due to their greater capacity to handle innovation projects internally and as competition increases, so does the payoff of an edge to competitors.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 702.

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Length: 33 pages
Date of creation: 10 Oct 2008
Date of revision:
Handle: RePEc:hhs:hastef:0702

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Keywords: R&D; innovation; competition; service sector;

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  1. Nickell, Stephen J, 1996. "Competition and Corporate Performance," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 104(4), pages 724-46, August.
  2. Keller, W., 1997. "Trade and the Transmission of Technology," Working papers, Wisconsin Madison - Social Systems 9620r, Wisconsin Madison - Social Systems.
  3. Philippe Aghion & Nicholas Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2002. "Competition and innovation: an inverted U relationship," IFS Working Papers, Institute for Fiscal Studies W02/04, Institute for Fiscal Studies.
  4. Geroski, P A, 1990. "Innovation, Technological Opportunity, and Market Structure," Oxford Economic Papers, Oxford University Press, vol. 42(3), pages 586-602, July.
  5. Boone, J., 2004. "A New Way to Measure Competition," Discussion Paper, Tilburg University, Tilburg Law and Economic Center 2004-004, Tilburg University, Tilburg Law and Economic Center.
  6. Rachel Griffith & Stephen Redding & John Van Reenen, 2004. "Mapping the Two Faces of R&D: Productivity Growth in a Panel of OECD Industries," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 883-895, November.
  7. Kraft, Kornelius, 1989. "Market Structure, Firm Characteristics and Innovative Activity," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 37(3), pages 329-36, March.
  8. Benoit Mulkay & Bronwyn H. Hall & Jacques Mairesse, 2001. "Firm Level Investment and R&D in France and the United States: A Comparison," Economics Papers 2001-W2, Economics Group, Nuffield College, University of Oxford.
  9. Poldahl, Andreas & Gustavsson Tingvall, Patrik, 2005. "Is There Really an Inverted U-shaped Relation Between Competition and R&D?," Working Paper Series, Trade Union Institute for Economic Research 204, Trade Union Institute for Economic Research.
  10. John Scott, 1984. "Firm versus Industry Variability in R&D Intensity," NBER Chapters, National Bureau of Economic Research, Inc, in: R & D, Patents, and Productivity, pages 233-248 National Bureau of Economic Research, Inc.
  11. Richard Blundell & Rachel Griffith & John Van Reenen, 1994. "Dynamic count data models of technological innovation," IFS Working Papers, Institute for Fiscal Studies W94/10, Institute for Fiscal Studies.
  12. Reinganum, Jennifer F., 1989. "The timing of innovation: Research, development, and diffusion," Handbook of Industrial Organization, Elsevier, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 14, pages 849-908 Elsevier.
  13. Hipp, Christiane & Grupp, Hariolf, 2005. "Innovation in the service sector: The demand for service-specific innovation measurement concepts and typologies," Research Policy, Elsevier, Elsevier, vol. 34(4), pages 517-535, May.
  14. Mansfield, Edwin, 1983. "Technological Change and Market Structure: An Empirical Study," American Economic Review, American Economic Association, American Economic Association, vol. 73(2), pages 205-09, May.
  15. Kilponen , Juha & Santavirta, Torsten, 2007. "When do R&D subsidies boost innovation? Revisiting the inverted U-shape," Research Discussion Papers, Bank of Finland 10/2007, Bank of Finland.
  16. R. Gaston Gelos & Alberto Isgut, 2001. "Fixed Capital Adjustment: Is Latin America Different?," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 717-726, November.
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Cited by:
  1. Michael Polder & Erik Veldhuizen, 2012. "Innovation and Competition in the Netherlands: Testing the Inverted-U for Industries and Firms," Journal of Industry, Competition and Trade, Springer, Springer, vol. 12(1), pages 67-91, March.
  2. Bergman, Karin & Ejermo, Olof, 2011. "Swedish Business R&D and its Export Dependence," Working Papers, Lund University, Department of Economics 2011:26, Lund University, Department of Economics.
  3. Karpaty, Patrik & Gustavsson Tingvall, Patrik, 2012. "Offshoring of Services and Corruption: Do Firms Escape Corrupt Countries?," Ratio Working Papers, The Ratio Institute 192, The Ratio Institute.
  4. Tingvall, Patrik & Karpaty, Patrik, 2011. "Offshoring and Home Country R&D," Ratio Working Papers, The Ratio Institute 180, The Ratio Institute.

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