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A Minimum of Rivalry : Evidence from Transition Economies on the Importance of Competition for Innovation and Growth

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  • Carlin, Wendy
  • Schaffer, Mark
  • Seabright, Paul

Abstract

This Paper examines the importance of competition in the growth and development of firms. We make use of the large-scale natural experiment of the shift from an economic system without competition to a market economy to shed light on the factors that influence innovation by firms and their subsequent growth. Our data come from a survey of nearly 4,000 firms in 24 transition countries. These data have three main advantages. First, while in a market economy firms face widely divergent needs and opportunities for innovation, virtually every firm that emerged from central planning was maladapted to the new environment, and needed to innovate at least modestly in order to survive. Second, we measure directly the degree of competition perceived by each firm in its principal market rather than attempting to infer this from market data collected by statistical agencies; and we collect data directly on various measures of innovative activity. Third, the fact that transition countries inherited market structures from a regime in which selection and incentive effects of competition were not operational and were then subjected to a dramatic shock to competition mitigates some of the endogeneity problems associated with measures of competition in market economies. We find evidence of the importance of a minimum of rivalry in both innovation and growth: the presence of at least a few competitors is effective both directly and through improving the efficiency with which the rents from market power in product markets are utilised to undertake innovation. There is also some less clear-cut evidence that the presence of a few rivals is more conducive to performance than the presence of many competitors.

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Bibliographic Info

Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 272.

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Date of creation: Mar 2004
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Publication status: Published in Contributions to Economic Analysis and Policy, vol.�3, n°1, 2004, p.�1-42.
Handle: RePEc:ide:wpaper:1782

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  1. Djankov, Simeon & Murrell, Peter, 2002. "Enterprise Restructuring in Transition: A Quantitative Survey," CEPR Discussion Papers 3319, C.E.P.R. Discussion Papers.
  2. Nickell, S.J., 1993. "Competition and Crporate Performance," Economics Series Working Papers 99155, University of Oxford, Department of Economics.
  3. Mathias Dewatripont & Philippe Aghion & Patrick Rey, 1999. "Competition, financial discipline and growth," ULB Institutional Repository 2013/9619, ULB -- Universite Libre de Bruxelles.
  4. Philippe Aghion & Nicholas Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2002. "Competition and innovation: an inverted U relationship," IFS Working Papers W02/04, Institute for Fiscal Studies.
  5. Harris, Christopher & Howitt, Peter & Vickers, John & Aghion, Philippe, 2001. "Competition, Imitation and Growth with Step-by-Step Innovation," Scholarly Articles 12375013, Harvard University Department of Economics.
  6. Wendy Carlin & Jonathan Haskel & Paul Seabright, 2001. "Understanding ‘The Essential Fact about Capitalism’: Markets, Competition and Creative Destruction," National Institute Economic Review, National Institute of Economic and Social Research, vol. 175(1), pages 67-84, January.
  7. Fuller, Wayne A, 1977. "Some Properties of a Modification of the Limited Information Estimator," Econometrica, Econometric Society, vol. 45(4), pages 939-53, May.
  8. Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2002. "Instrumental variables and GMM: Estimation and testing," Boston College Working Papers in Economics 545, Boston College Department of Economics, revised 14 Feb 2003.
  9. Aghion, Philippe & Harris, Christopher & Vickers, John, 1997. "Competition and growth with step-by-step innovation: An example," European Economic Review, Elsevier, vol. 41(3-5), pages 771-782, April.
  10. Bresnahan, T.F & Reiss, P.C., 1989. "Entry And Competition In Concentrated Markets," Papers 151, Stanford - Studies in Industry Economics.
  11. Carlin, Wendy & Fries, Steven & Schaffer, Mark E & Seabright, Paul, 2001. "Competition and Enterprise Performance in Transition Economies: Evidence from a Cross-country Survey," CEPR Discussion Papers 2840, C.E.P.R. Discussion Papers.
  12. Robert E. Hall, 1986. "The Relation Between Price and Marginal Cost in U.S. Industry," NBER Working Papers 1785, National Bureau of Economic Research, Inc.
  13. Jerry HAUSMAN & Gregory LEONARD & J. Douglas ZONA, 1994. "Competitive Analysis with Differentiated Products," Annales d'Economie et de Statistique, ENSAE, issue 34, pages 159-180.
  14. Aghion, Philippe, et al, 2001. "Competition, Imitation and Growth with Step-by-Step Innovation," Review of Economic Studies, Wiley Blackwell, vol. 68(3), pages 467-92, July.
  15. Blundell, Richard & Griffith, Rachel & van Reenen, John, 1999. "Market Share, Market Value and Innovation in a Panel of British Manufacturing Firms," Review of Economic Studies, Wiley Blackwell, vol. 66(3), pages 529-54, July.
  16. Aghion, Philippe & Dewatripont, Mathias & Rey, Patrick, 1999. "Competition, Financial Discipline and Growth," Scholarly Articles 12490416, Harvard University Department of Economics.
  17. Grosfeld, Irena & Tressel, Thierry, 2001. "Competition, Corporate Governance: Substitutes or Complements? Evidence from the Warsaw Stock Exchange," CEPR Discussion Papers 2888, C.E.P.R. Discussion Papers.
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