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The Effects of Entry on Incumbent Innovation and Productivity

  • Aghion, Philippe
  • Blundell, Richard William
  • Griffith, Rachel
  • Howitt, Peter
  • Prantl, Susanne

How does firm entry affect innovation incentives and productivity growth in incumbent firms? Micro-data suggests that there is heterogeneity across industries - incumbents in technologically advanced industries react positively to entry, but not in laggard industries. To explain this pattern, we introduce entry into a Schumpeterian growth model with multiple sectors which differ by their distance to the technological frontier. We show that entry threat spurs innovation incentives in technologically advanced sectors - successful innovation allows incumbents to prevent entry. In laggard sectors it discourages innovation - increased entry reduces incumbents' expected rents from innovating. We find that the empirical patterns hold using rich micro-level productivity growth and patent panel data for the UK, and controlling for the endogeneity of entry by exploiting the large number of policy reforms undertaken during the Thatcher era.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5323.

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Date of creation: Oct 2005
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Handle: RePEc:cpr:ceprdp:5323
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