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Foreign competition and innovation

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  • Helpman, Elhanan

Abstract

Empirical studies have found that enhanced foreign competition can encourage or discourage innovation. To address this relationship, I examine a market structure in which a small number of large multi-product oligopolists compete with a large number of small single-product firms in the same industry. The single-product firms are short-lived while the multi-product firms live forever, and the large firms invest in innovation in order to enlarge their product spans. All firms export. I show that an increase in the competitiveness of foreign firms can increase or reduce innovation efforts of a large multi-product firm. Moreover, changes in the incentives to innovate can be different for more-productive and less-productive oligopolists. As a result, aggregate sectoral innovation may rise or decline, depending on the productivity distribution of the oligopolists. I also show that changes in short-term operating profits may not be aligned with changes in the incentives to innovate.

Suggested Citation

  • Helpman, Elhanan, 2024. "Foreign competition and innovation," Journal of International Economics, Elsevier, vol. 152(C).
  • Handle: RePEc:eee:inecon:v:152:y:2024:i:c:s002219962400134x
    DOI: 10.1016/j.jinteco.2024.104007
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    References listed on IDEAS

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    More about this item

    Keywords

    Trade; Innovation; Firm dynamics; Product span;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • F1 - International Economics - - Trade
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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