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Service-sector competition, innovation and R&D

The central prediction of the Aghion et al. (2005) model is an inverted U-shaped relation between innovation and competition. The model is built on the assumption of a product market and has not yet been empirically tested on service-sector firms. Using detailed firm-level data, we find the inverse U-shaped relation to hold for both small and large service-sector firms. However, non-exporting service firms deviate from the overall pattern. A more detailed breakdown of innovation expenditures shows that the inverse U-shaped pattern holds for both intramural R&D and training, but not for extramural R&D. Finally, as competition increases, small firms tend to seek more strategic alliances with competitors while large firms tend to decrease their collaboration with competitors. To some extent, the behavior of large firms can be due to their greater capacity to handle innovation projects internally and as competition increases, so does the payoff of an edge to competitors.

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Paper provided by Stockholm School of Economics in its series SSE/EFI Working Paper Series in Economics and Finance with number 702.

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Length: 33 pages
Date of creation: 10 Oct 2008
Date of revision:
Handle: RePEc:hhs:hastef:0702
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  1. Jan Boone, 2008. "A New Way to Measure Competition," Economic Journal, Royal Economic Society, vol. 118(531), pages 1245-1261, 08.
  2. Keller, W., 1996. "Trade and the Transmission of Technology," Working papers 9620, Wisconsin Madison - Social Systems.
  3. Rachel Griffith & Stephen Redding & John Van Reenen, 2000. "Mapping the two faces of R&D: productivity growth in a panel of OECD industries," IFS Working Papers W00/02, Institute for Fiscal Studies.
  4. Poldahl, Andreas & Gustavsson Tingvall, Patrik, 2005. "Is There Really an Inverted U-shaped Relation Between Competition and R&D?," Working Paper Series 204, Trade Union Institute for Economic Research.
  5. Benoît Mulkay & Bronwyn H, Hall & Jacques Mairesse, 2000. "Firm Level Investment and R&D in France and the United States : A Comparison," Working Papers 2000-49, Centre de Recherche en Economie et Statistique.
  6. Richard Blundell & Rachel Griffith & John Van Reenen, 1994. "Dynamic count data models of technological innovation," IFS Working Papers W94/10, Institute for Fiscal Studies.
  7. John Scott, 1984. "Firm versus Industry Variability in R&D Intensity," NBER Chapters, in: R&D, Patents, and Productivity, pages 233-248 National Bureau of Economic Research, Inc.
  8. Nickell, Stephen J, 1996. "Competition and Corporate Performance," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 724-46, August.
  9. Kraft, Kornelius, 1989. "Market Structure, Firm Characteristics and Innovative Activity," Journal of Industrial Economics, Wiley Blackwell, vol. 37(3), pages 329-36, March.
  10. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: An Inverted-U Relationship," The Quarterly Journal of Economics, MIT Press, vol. 120(2), pages 701-728, May.
  11. Geroski, P A, 1990. "Innovation, Technological Opportunity, and Market Structure," Oxford Economic Papers, Oxford University Press, vol. 42(3), pages 586-602, July.
  12. Mansfield, Edwin, 1983. "Technological Change and Market Structure: An Empirical Study," American Economic Review, American Economic Association, vol. 73(2), pages 205-09, May.
  13. Reinganum, Jennifer F., 1989. "The timing of innovation: Research, development, and diffusion," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 14, pages 849-908 Elsevier.
  14. R. Gaston Gelos & Alberto Isgut, 2001. "Fixed Capital Adjustment: Is Latin America Different?," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 717-726, November.
  15. Kilponen , Juha & Santavirta, Torsten, 2007. "When do R&D subsidies boost innovation? Revisiting the inverted U-shape," Research Discussion Papers 10/2007, Bank of Finland.
  16. Hipp, Christiane & Grupp, Hariolf, 2005. "Innovation in the service sector: The demand for service-specific innovation measurement concepts and typologies," Research Policy, Elsevier, vol. 34(4), pages 517-535, May.
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