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Competition and innovation: an inverted U relationship

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  • Philippe Aghion

    (Institute for Fiscal Studies and Harvard University)

  • Nicholas Bloom
  • Richard Blundell

    ()
    (Institute for Fiscal Studies and University College London)

  • Rachel Griffith

    ()
    (Institute for Fiscal Studies and University of Manchester)

  • Peter Howitt

    (Institute for Fiscal Studies and Brown University)

Abstract

This paper investigates the relationship between product market competition (PMC) and innovation. A Schumpeterian growth model is developed in which firms innovate ѳtep-by-stepҬ and where both technological leaders and their followers engage in R&D activities. In this model, competition may increase the incremental profit from innovating; on the other hand, competition may also reduce innovation incentives for laggards. This model generates four main predictions which we test empirically. First, the relationship between product market competition (PMC) and innovation is an inverted U-shape: the escape competition effect dominates for low initial levels of competition, whereas the Schumpeterian effect dominates at higher levels of competition. Second, the equilibrium degree of technological Ѯeck-and-neckness' among firms should decrease with PMC. Third, the higher the average degree of Ѯeck-and-neckness' in an industry, the steeper the inverted-U relationship between PMC and innovation in that industry. Fourth, firms may innovate more if subject to higher debt-pressure, especially at lower levels of PMC. We confront these four predictions with a new panel data set on UK firms' patenting activity at the US patenting office. The inverted U relationship, the neck and neck, and the debt pressure predictions are found to accord well with observed behavior in the data.

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Bibliographic Info

Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number W02/04.

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Length: 70 pp
Date of creation: Feb 2002
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Handle: RePEc:ifs:ifsewp:02/04

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  1. Ricardo J. Caballero & Adam B. Jaffe, 1993. "How High are the Giants' Shoulders: An Empirical Assessment of Knowledge Spillovers and Creative Destruction in a Model of Economic Growth," NBER Chapters, in: NBER Macroeconomics Annual 1993, Volume 8, pages 15-86 National Bureau of Economic Research, Inc.
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  6. Stephen Nickell, 1993. "Competition and Corporate Performance," CEP Discussion Papers dp0182, Centre for Economic Performance, LSE.
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  8. Mathias Dewatripont & Philippe Aghion & Patrick Rey, 1999. "Competition, financial discipline and growth," ULB Institutional Repository 2013/9619, ULB -- Universite Libre de Bruxelles.
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  22. Philippe Aghion & Mark Schankerman, 1999. "Competition, entry and the social returns to infrastructure in transition economies," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 7(1), pages 79-101, March.
  23. Philippe Aghion & Wendy Carlin & Mark Schaffer, 2002. "Competition, Innovation and Growth in Transition: Exploring the Interactions between Policies," William Davidson Institute Working Papers Series 501, William Davidson Institute at the University of Michigan.
  24. 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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  1. ¿Por qué necesitamos a los â??talibanes de la competenciaâ??
    by Juan Santaló in Nada Es Gratis on 2012-01-26 07:00:41
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