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Competition, imitation, and technical change : quality vs. variety

  • Cusolito, Ana
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    Some researchers have documented that the path of development is remarkably related to the pattern of sectoral diversification. Others have highlighted the relation between productive specialization and economic progress. This paper explores the role of product market competition and intellectual property rights protection in the pattern of sectoral diversification. The paper confirms the insight of the innovation literature, that competition induces firms to specialize and upgrade the quality of existing goods. However, it reveals a new force, called the imitation effect, through which competition biases technical change toward product diversification. The paper shows that if knowledge spillovers increase with imitation, or the degree of product substitution is high, weak protection of property rights encourages firms to create low-quality goods, thereby directing technical change toward diversification. The predictions are tested with data on Italian firms'innovation activity. They are found to be consistent with observed behavior.

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    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4997.

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    Date of creation: 01 Jul 2009
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    Handle: RePEc:wbk:wbrwps:4997
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    5. Philippe Aghion & Nicholas Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2002. "Competition and Innovation: An Inverted U Relationship," NBER Working Papers 9269, National Bureau of Economic Research, Inc.
    6. Dasgupta, Partha & Stiglitz, Joseph, 1980. "Industrial Structure and the Nature of Innovative Activity," Economic Journal, Royal Economic Society, vol. 90(358), pages 266-93, June.
    7. Amit Khandelwal, 2010. "The Long and Short (of) Quality Ladders," Review of Economic Studies, Oxford University Press, vol. 77(4), pages 1450-1476.
    8. Vives, Xavier, 2004. "Innovation and Competitive Pressure," CEPR Discussion Papers 4369, C.E.P.R. Discussion Papers.
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    19. Richard Blundell & Rachel Griffith & John Van Reenen, 1994. "Dynamic count data models of technological innovation," IFS Working Papers W94/10, Institute for Fiscal Studies.
    20. Rauch, James E., 1999. "Networks versus markets in international trade," Journal of International Economics, Elsevier, vol. 48(1), pages 7-35, June.
    21. Nickell, S.J., 1993. "Competition and Crporate Performance," Economics Series Working Papers 99155, University of Oxford, Department of Economics.
    22. Helpman, E., 1992. "Innovation, Imitation and intellectual Property Rights," Harvard Institute of Economic Research Working Papers 1597, Harvard - Institute of Economic Research.
    23. Paul Romer, 1989. "Endogenous Technological Change," NBER Working Papers 3210, National Bureau of Economic Research, Inc.
    24. Sutton, John, 1996. "Technology and market structure," European Economic Review, Elsevier, vol. 40(3-5), pages 511-530, April.
    25. Lai, Edwin L. -C., 1998. "International intellectual property rights protection and the rate of product innovation," Journal of Development Economics, Elsevier, vol. 55(1), pages 133-153, February.
    26. 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.
    27. David Hummels & Peter J. Klenow, 2005. "The Variety and Quality of a Nation's Exports," American Economic Review, American Economic Association, vol. 95(3), pages 704-723, June.
    28. Motta, Massimo, 1993. "Endogenous Quality Choice: Price vs. Quantity Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 41(2), pages 113-31, June.
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