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Continuous improvement and competitive pressure in the presence of discrete innovation


  • Arghya Ghosh

    () (School of Economics, The University of New South Wales)

  • Takao Kato

    (Colgate University)

  • Hodaka Morita

    () (School of Economics, The University of New South Wales)


Does competitive pressure foster innovation? Technical progress consists of numerous small improvements made upon the existing technology continuous improvement and innovative activities aiming at entirely new technology (discrete innovation). Continuous improvement is often of limited relevance to the new technology invented by successful discrete innovation. By capturing this interplay, our model predicts that, in contrast to previous theoretical findings, an increase in competitive pressure measured by product substitutability may decrease firms' incentives to conduct continuous improvement. Continuous improvement had been regarded as an important source of strength in Japanese manufacturing until the 1980s. However, several studies have found that levels of continuous improvement have recently decreased in a number of Japanese manufacturing firms. Through field research at two Japanese firms, we demonstrate the real-world relevance and usefulness of the model which offers new insights on possible mechanisms behind the declining focus on continuous improvement in Japan.

Suggested Citation

  • Arghya Ghosh & Takao Kato & Hodaka Morita, 2012. "Continuous improvement and competitive pressure in the presence of discrete innovation," Discussion Papers 2012-17, School of Economics, The University of New South Wales.
  • Handle: RePEc:swe:wpaper:2012-17

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    References listed on IDEAS

    1. Jennifer F. Reinganum, 1985. "Innovation and Industry Evolution," The Quarterly Journal of Economics, Oxford University Press, vol. 100(1), pages 81-99.
    2. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, Oxford University Press, vol. 120(2), pages 701-728.
    3. Gene M. Grossman & Elhanan Helpman, 1991. "Quality Ladders in the Theory of Growth," Review of Economic Studies, Oxford University Press, vol. 58(1), pages 43-61.
    4. Tom Lee & Louis L. Wilde, 1980. "Market Structure and Innovation: A Reformulation," The Quarterly Journal of Economics, Oxford University Press, vol. 94(2), pages 429-436.
    5. Carmichael, H Lorne & MacLeod, W Bentley, 2000. "Worker Cooperation and the Ratchet Effect," Journal of Labor Economics, University of Chicago Press, vol. 18(1), pages 1-19, January.
    6. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
    7. Glenn C. Loury, 1979. "Market Structure and Innovation," The Quarterly Journal of Economics, Oxford University Press, vol. 93(3), pages 395-410.
    8. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, January.
    9. Howard F. Chang, 1995. "Patent Scope, Antitrust Policy, and Cumulative Innovation," RAND Journal of Economics, The RAND Corporation, vol. 26(1), pages 34-57, Spring.
    10. Tandon, Pankaj, 1984. "Innovation, Market Structure, and Welfare," American Economic Review, American Economic Association, vol. 74(3), pages 394-403, June.
    11. Richard Blundell & Rachel Griffith & John van Reenen, 1999. "Market Share, Market Value and Innovation in a Panel of British Manufacturing Firms," Review of Economic Studies, Oxford University Press, vol. 66(3), pages 529-554.
    12. Sacco, Dario & Schmutzler, Armin, 2011. "Is there a U-shaped relation between competition and investment?," International Journal of Industrial Organization, Elsevier, vol. 29(1), pages 65-73, January.
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    More about this item


    Competitive pressure; continuous improvement; discrete innovation; field research; location model; product substitutability; small group activities; technical progress.;

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • M50 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - General
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General


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