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Competitive Pressure: The Effects on Investments in Product and Process Innovation

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  • Jan Boone

Abstract

I analyze the effects of competitive pressure on a firm's incentives to invest in product and process innovations. I present a framework incorporating the selection and adaptation effects of product market competition on efficiency and the Schumpeterian argument for monopoly power. The effects of competition on a firm's innovations depend on whether a firm is complacent, eager, struggling, or faint, which is determined by the firm's efficiency level relative to that of its opponents. Finally, the following tradeoff is pointed out: a rise in competitive pressure cannot raise both product and process innovations at the industry level.

Suggested Citation

  • Jan Boone, 2000. "Competitive Pressure: The Effects on Investments in Product and Process Innovation," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 549-569, Autumn.
  • Handle: RePEc:rje:randje:v:31:y:2000:i:autumn:p:549-569
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    1. Martin Stephen, 1993. "Endogenous Firm Efficiency in a Cournot Principal-Agent Model," Journal of Economic Theory, Elsevier, vol. 59(2), pages 445-450, April.
    2. John Van Reenen, 1996. "The Creation and Capture of Rents: Wages and Innovation in a Panel of U. K. Companies," The Quarterly Journal of Economics, Oxford University Press, vol. 111(1), pages 195-226.
    3. Benjamin E. Hermalin, 1992. "The Effects of Competition on Executive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 23(3), pages 350-365, Autumn.
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    5. Schmidt, Klaus M., 1996. "Managerial Incentives and Product Market Competition," CEPR Discussion Papers 1382, C.E.P.R. Discussion Papers.
    6. Blundell, Richard & Griffith, Rachel & Van Reenen, John, 1995. "Dynamic Count Data Models of Technological Innovation," Economic Journal, Royal Economic Society, vol. 105(429), pages 333-344, March.
    7. Oliver D. Hart, 1983. "The Market Mechanism as an Incentive Scheme," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 366-382, Autumn.
    8. Nickell, Stephen J, 1996. "Competition and Corporate Performance," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 724-746, August.
    9. Klaus M. Schmidt, 1997. "Managerial Incentives and Product Market Competition," Review of Economic Studies, Oxford University Press, vol. 64(2), pages 191-213.
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