IDEAS home Printed from https://ideas.repec.org/p/hrv/faseco/4554222.html
   My bibliography  Save this paper

The Effects of Entry on Incumbent Innovation and Productivity

Author

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

Abstract

How does firm entry affect innovation incentives in incumbent firms? Microdata suggest that there is heterogeneity across industries. Specifically, incumbent productivity growth and patenting is positively correlated with lagged greenfield foreign firm entry in technologically advanced industries, but not in laggard industries. In this paper we provide evidence that these correlations arise from a causal effect predicted by Schumpeterian growth theory—the threat of technologically advanced entry spurs innovation incentives in sectors close to the technology frontier, where successful innovation allows incumbents to survive the threat, but discourages innovation in laggard sectors, where the threat reduces incumbents' expected rents from innovating. We find that the empirical patterns hold using rich micro panel data for the United Kingdom. We control for the endogeneity of entry by exploiting major European and U.K. policy reforms, and allow for endogeneity of additional factors. We complement the analysis for foreign entry with evidence for domestic entry and entry through imports.

Suggested Citation

  • Richard, Blundell & Rachel, Griffith & Peter, Howitt & Susanne, Prantl & Aghion, Philippe, 2009. "The Effects of Entry on Incumbent Innovation and Productivity," Scholarly Articles 4554222, Harvard University Department of Economics.
  • Handle: RePEc:hrv:faseco:4554222
    as

    Download full text from publisher

    File URL: http://dash.harvard.edu/bitstream/handle/1/4554222/aghion_incumbent.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2003. "Plants and Productivity in International Trade," American Economic Review, American Economic Association, vol. 93(4), pages 1268-1290, September.
    2. Philippe Aghion & Robin Burgess & Stephen J. Redding & Fabrizio Zilibotti, 2008. "The Unequal Effects of Liberalization: Evidence from Dismantling the License Raj in India," American Economic Review, American Economic Association, vol. 98(4), pages 1397-1412, September.
    3. Tor Jakob Klette, 1999. "Market Power, Scale Economies and Productivity: Estimates from a Panel of Establishment Data," Journal of Industrial Economics, Wiley Blackwell, vol. 47(4), pages 451-476, December.
    4. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    5. Jonathan E. Haskel & Sonia C. Pereira & Matthew J. Slaughter, 2007. "Does Inward Foreign Direct Investment Boost the Productivity of Domestic Firms?," The Review of Economics and Statistics, MIT Press, vol. 89(3), pages 482-496, August.
    6. Nicholas Bloom & Raffaella Sadun & John Van Reenen, 2012. "Americans Do IT Better: US Multinationals and the Productivity Miracle," American Economic Review, American Economic Association, vol. 102(1), pages 167-201, February.
    7. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(2), pages 701-728.
    8. Simeon Djankov & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2002. "The Regulation of Entry," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 1-37.
    9. Chiara Criscuolo & Ralf Martin, 2009. "Multinationals and U.S. Productivity Leadership: Evidence from Great Britain," The Review of Economics and Statistics, MIT Press, vol. 91(2), pages 263-281, May.
    10. Roger Clarke & Stephen Davies & Nigel Driffield, 1998. "Monopoly Policy in the UK," Books, Edward Elgar Publishing, number 1254, December.
    11. Eric J. Bartelsman & Wayne Gray, 1996. "The NBER Manufacturing Productivity Database," NBER Technical Working Papers 0205, National Bureau of Economic Research, Inc.
    12. Rachel Griffith & Stephen Redding & John Van Reenen, 2004. "Mapping the Two Faces of R&D: Productivity Growth in a Panel of OECD Industries," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 883-895, November.
    13. Nina Pavcnik, 2002. "Trade Liberalization, Exit, and Productivity Improvements: Evidence from Chilean Plants," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(1), pages 245-276.
    14. Wolfgang Keller & Stephen R. Yeaple, 2009. "Multinational Enterprises, International Trade, and Productivity Growth: Firm-Level Evidence from the United States," The Review of Economics and Statistics, MIT Press, vol. 91(4), pages 821-831, November.
    15. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
    16. Richard Blundell & James L. Powell, 2001. "Endogeneity in nonparametric and semiparametric regression models," CeMMAP working papers 09/01, Institute for Fiscal Studies.
    17. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    18. repec:rus:hseeco:71089 is not listed on IDEAS
    19. Nickell, Stephen J, 1996. "Competition and Corporate Performance," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 724-746, August.
    20. F. Zilibotti & P. Aghion & R. Burgess, 2004. "The Unequal Effects of Trade Liberalization: Theory and Evidence from India," 2004 Meeting Papers 40, Society for Economic Dynamics.
    21. Howitt, Peter & Mayer-Foulkes, David, 2005. "R&D, Implementation, and Stagnation: A Schumpeterian Theory of Convergence Clubs," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(1), pages 147-177, February.
    22. Brian J. Aitken & Ann E. Harrison, 2022. "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela," World Scientific Book Chapters, in: Globalization, Firms, and Workers, chapter 6, pages 139-152, World Scientific Publishing Co. Pte. Ltd..
    23. Timothy Dunne & Mark J. Roberts & Larry Samuelson, 1988. "Patterns of Firm Entry and Exit in U.S. Manufacturing Industries," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 495-515, Winter.
    24. Richard Disney & Jonathan Haskel & Ylva Heden, 2003. "Restructuring and productivity growth in uk manufacturing," Economic Journal, Royal Economic Society, vol. 113(489), pages 666-694, July.
    25. Rachel Griffith, 1999. "Using the ARD establishment level data to look at foreign ownership and productivity in the UK," IFS Working Papers W99/06, Institute for Fiscal Studies.
    26. Griffith, Rachel & Redding, Stephen & Simpson, Helen, 2002. "Productivity Convergence and Foreign Ownership at the Establishment Level," CEPR Discussion Papers 3765, C.E.P.R. Discussion Papers.
    27. repec:rus:hseeco:122439 is not listed on IDEAS
    28. Caves, Douglas W & Christensen, Laurits R & Diewert, W Erwin, 1982. "Multilateral Comparisons of Output, Input, and Productivity Using Superlative Index Numbers," Economic Journal, Royal Economic Society, vol. 92(365), pages 73-86, March.
    29. Philippe Aghion & Robin Burgess & Stephen Redding & Fabrizio Zilibotti, 2005. "Entry Liberalization and Inequality in Industrial Performance," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 291-302, 04/05.
    30. Dewatripont,Mathias & Hansen,Lars Peter & Turnovsky,Stephen J. (ed.), 2003. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521818728, November.
    31. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-1297, November.
    32. Caves, Douglas W & Christensen, Laurits R & Diewert, W Erwin, 1982. "The Economic Theory of Index Numbers and the Measurement of Input, Output, and Productivity," Econometrica, Econometric Society, vol. 50(6), pages 1393-1414, November.
    33. Griffith, Rachel, 1999. "Using the ARD Establishment Level Data to Look at Foreign Ownership and Productivity in the United Kingdom," Economic Journal, Royal Economic Society, vol. 109(456), pages 416-442, June.
    34. Philippe Aghion & Christopher Harris & Peter Howitt & John Vickers, 2001. "Competition, Imitation and Growth with Step-by-Step Innovation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 68(3), pages 467-492.
    35. David Parker, 2004. "The UK's Privatisation Experiment: The Passage of Time Permits a Sober Assessment," CESifo Working Paper Series 1126, CESifo.
    36. Bertschek, Irene, 1995. "Product and Process Innovation as a Response to Increasing Import and Foreign Direct Investment," Journal of Industrial Economics, Wiley Blackwell, vol. 43(4), pages 341-357, December.
    37. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 977-1009, October.
    38. Tirole, Jean, 1986. "Procurement and Renegotiation," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 235-259, April.
    39. Marianne Bertrand & Francis Kramarz, 2002. "Does Entry Regulation Hinder Job Creation? Evidence from the French Retail Industry," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(4), pages 1369-1413.
    40. Daron Acemoglu & Philippe Aghion & Fabrizio Zilibotti, 2006. "Distance to Frontier, Selection, and Economic Growth," Journal of the European Economic Association, MIT Press, vol. 4(1), pages 37-74, March.
    41. William H. Greene, 1994. "Accounting for Excess Zeros and Sample Selection in Poisson and Negative Binomial Regression Models," Working Papers 94-10, New York University, Leonard N. Stern School of Business, Department of Economics.
    42. Klette, Tor Jakob, 1999. "Market Power, Scale Economies and Productivity: Estimates from a Panel of Establishment Data," Journal of Industrial Economics, Wiley Blackwell, vol. 47(4), pages 451-476, December.
    43. Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, vol. 60(4), pages 889-917, July.
    44. Beata Smarzynska Javorcik, 2004. "Does Foreign Direct Investment Increase the Productivity of Domestic Firms? In Search of Spillovers Through Backward Linkages," American Economic Review, American Economic Association, vol. 94(3), pages 605-627, June.
    45. Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-366, May.
    46. Geroski, P. A., 1995. "What do we know about entry?," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 421-440, December.
    47. Mary Amiti & Jozef Konings, 2007. "Trade Liberalization, Intermediate Inputs, and Productivity: Evidence from Indonesia," American Economic Review, American Economic Association, vol. 97(5), pages 1611-1638, December.
    48. Dewatripont,Mathias & Hansen,Lars Peter & Turnovsky,Stephen J. (ed.), 2003. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521524131, November.
    49. Nicolas Bloom & John Van Reenen, 2000. "Patents, productivity and market value: evidence from a panel of UK firms," IFS Working Papers W00/21, Institute for Fiscal Studies.
    50. Howitt, Peter & Aghion, Philippe, 2006. "Appropriate Growth Policy: A Unifying Framework," Scholarly Articles 4554121, Harvard University Department of Economics.
    51. Mayes,David & Hart,Peter, 1994. "The Single Market Programme as a Stimulus to Change," Cambridge Books, Cambridge University Press, number 9780521471565, November.
    52. Giuseppe Nicoletti & Stefano Scarpetta, 2003. "Regulation, productivity and growth: OECD evidence [‘A model of growth through creative destruction’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 18(36), pages 9-72.
    53. Richard Disney & Jonathan Haskel & Ylva Heden, 2003. "Entry, Exit and Establishment Survival in UK Manufacturing," Journal of Industrial Economics, Wiley Blackwell, vol. 51(1), pages 91-112, March.
    54. Dewatripont,Mathias & Hansen,Lars Peter & Turnovsky,Stephen J. (ed.), 2003. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521818735, November.
    55. Dewatripont,Mathias & Hansen,Lars Peter & Turnovsky,Stephen J. (ed.), 2003. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521524124, November.
    56. Timothy F. Bresnahan & Peter C. Reiss, 1990. "Entry in Monopoly Market," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(4), pages 531-553.
    57. David Card & Richard Blundell & Richard B. Freeman, 2004. "Seeking a Premier Economy: The Economic Effects of British Economic Reforms, 1980–2000," NBER Books, National Bureau of Economic Research, Inc, number card04-1, July.
    58. Philippe Aghion & Richard Blundell & Rachel Griffith & Peter Howitt & Susanne Prantl, 2004. "Entry and Productivity Growth: Evidence from Microlevel Panel Data," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 265-276, 04/05.
    59. Rachel Griffith & Helen Simpson, 2004. "Characteristics of Foreign-Owned Firms in British Manufacturing," NBER Chapters, in: Seeking a Premier Economy: The Economic Effects of British Economic Reforms, 1980–2000, pages 147-180, National Bureau of Economic Research, Inc.
    60. Davies, Stephen W & Driffield, Nigel L & Clarke, Roger, 1999. "Monopoly in the UK: What Determines Whether the MMC Finds against the Investigated Firms?," Journal of Industrial Economics, Wiley Blackwell, vol. 47(3), pages 263-283, September.
    61. Stephen W. Davies & Nigel L. Driffield & Roger Clarke, 1999. "Monopoly in the UK: What determines whether the MMC finds against the investigated firms?," Journal of Industrial Economics, Wiley Blackwell, vol. 47(3), pages 263-283, September.
    62. Richard Blundell & Rachel Griffith & John van Reenen, 1999. "Market Share, Market Value and Innovation in a Panel of British Manufacturing Firms," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(3), pages 529-554.
    63. Richard E. Caves, 1998. "Industrial Organization and New Findings on the Turnover and Mobility of Firms," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 1947-1982, December.
    64. Moulton, Brent R, 1990. "An Illustration of a Pitfall in Estimating the Effects of Aggregate Variables on Micro Unit," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 334-338, May.
    65. Mathias Dewatripont & Lars Peter Hansen & Stephen Turnovsky, 2003. "Advances in economics and econometrics :theory and applications," ULB Institutional Repository 2013/9557, ULB -- Universite Libre de Bruxelles.
    66. Dewatripont,Mathias & Hansen,Lars Peter & Turnovsky,Stephen J. (ed.), 2003. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521818742, November.
    67. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 72(3), pages 514-526, June.
    68. Dewatripont,Mathias & Hansen,Lars Peter & Turnovsky,Stephen J. (ed.), 2003. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521524117, November.
    69. Aghion, Philippe & Harris, Christopher & Vickers, John, 1997. "Competition and growth with step-by-step innovation: An example," European Economic Review, Elsevier, vol. 41(3-5), pages 771-782, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Schiantarelli, Fabio, 2005. "Product Market Regulation and Macroeconomic Performance: A Review of Cross Country Evidence," IZA Discussion Papers 1791, Institute of Labor Economics (IZA).
    2. Rachel Griffith & Stephen Redding & Helen Simpson, 2009. "Technological Catch‐Up And Geographic Proximity," Journal of Regional Science, Wiley Blackwell, vol. 49(4), pages 689-720, October.
    3. Rachel Griffith & Rupert Harrison & Helen Simpson, 2010. "Product Market Reform and Innovation in the EU," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(2), pages 389-415, June.
    4. Renaud Bourlès & Gilbert Cette & Jimmy Lopez & Jacques Mairesse & Giuseppe Nicoletti, 2013. "Do Product Market Regulations In Upstream Sectors Curb Productivity Growth? Panel Data Evidence For OECD Countries," The Review of Economics and Statistics, MIT Press, vol. 95(5), pages 1750-1768, December.
    5. Brambilla, Irene, 2009. "Multinationals, technology, and the introduction of varieties of goods," Journal of International Economics, Elsevier, vol. 79(1), pages 89-101, September.
    6. Harris, Richard & Moffat, John, 2011. "Plant-level determinants of total factor productivity in Great Britain, 1997-2006," LSE Research Online Documents on Economics 33561, London School of Economics and Political Science, LSE Library.
    7. Keller, Wolfgang, 2010. "International Trade, Foreign Direct Investment, and Technology Spillovers," Handbook of the Economics of Innovation, in: Bronwyn H. Hall & Nathan Rosenberg (ed.), Handbook of the Economics of Innovation, edition 1, volume 2, chapter 0, pages 793-829, Elsevier.
    8. Elena Podrecca, 2013. "Riforme del mercato dei prodotti e crescita della produttivit?. Teoria ed evidenza empirica," ECONOMIA E SOCIET? REGIONALE, FrancoAngeli Editore, vol. 0(2), pages 10-41.
    9. Rachel Griffith & Stephen Redding & Helen Simpson, 2004. "Foreign Ownership and Productivity: New Evidence from the Service Sector and the R&D Lab," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 20(3), pages 440-456, Autumn.
    10. Anderton, Robert & Di Lupidio, Benedetta & Jarmulska, Barbara, 2020. "The impact of product market regulation on productivity through firm churning: Evidence from European countries," Economic Modelling, Elsevier, vol. 91(C), pages 487-501.
    11. Yuriy Gorodnichenko & Jan Svejnar & Katherine Terrell, 2010. "Globalization and Innovation in Emerging Markets," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 194-226, April.
    12. Benjamin Chabot & Charles C. Moul, 2014. "Bank Panics, Government Guarantees, and the Long‐Run Size of the Financial Sector: Evidence from Free‐Banking America," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(5), pages 961-997, August.
    13. Philippe Aghion & Peter Howitt & David Mayer-Foulkes, 2005. "The Effect of Financial Development on Convergence: Theory and Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(1), pages 173-222.
    14. Steven Bond‐Smith, 2022. "Discretely innovating: The effect of limited market contestability on innovation and growth," Scottish Journal of Political Economy, Scottish Economic Society, vol. 69(3), pages 301-327, July.
    15. Marc J. Melitz & Stephen J. Redding, 2021. "Trade and innovation," CEP Discussion Papers dp1777, Centre for Economic Performance, LSE.
    16. Paolo Buccirossi & Lorenzo Ciari & Tomaso Duso & Giancarlo Spagnolo & Cristiana Vitale, 2013. "Competition Policy and Productivity Growth: An Empirical Assessment," The Review of Economics and Statistics, MIT Press, vol. 95(4), pages 1324-1336, October.
    17. Neil Foster-McGregor, 2012. "Innovation and Technology Transfer across Countries," wiiw Research Reports 380, The Vienna Institute for International Economic Studies, wiiw.
    18. Griffith, Rachel & Redding, Stephen & Simpson, Helen, 2002. "Productivity Convergence and Foreign Ownership at the Establishment Level," CEPR Discussion Papers 3765, C.E.P.R. Discussion Papers.
    19. Francesco Daveri & Rémy Lecat & Maria Laura Parisi, 2016. "Service Deregulation, Competition, and the Performance of French and Italian Firms," Scottish Journal of Political Economy, Scottish Economic Society, vol. 63(3), pages 278-302, July.
    20. Ping Li & Guocai Yu, 2009. "The dynamics of China’s expenditure on R&D," Frontiers of Economics in China, Springer;Higher Education Press, vol. 4(1), pages 97-109, March.

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hrv:faseco:4554222. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Office for Scholarly Communication (email available below). General contact details of provider: https://edirc.repec.org/data/deharus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.