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Competition and innovation: does the distance to the technology frontier matter?

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  • Simon Alder

Abstract

This paper provides new evidence on the relationship between innovation, competitionnand distance to the technology frontier, using enterprise surveys from 40 developing and transition countries. Different from previous empirical studies, the distance to frontier is measured by a firm's technology level relative to its main competitor. This self-reported comparison allows to capture a crucial determinant of a firm's business strategy and its response to competition. The findings from the empirical analysis are as follows. Firstly, firms with more advanced technology compared to their main competitors have more product innovations. Secondly, there is evidence that innovation and competition are more positively correlated at low levels of competition than at high levels. With some measures of competition,nthe correlation is highest at intermediate levels of competition, which suggestsnan inverted-U relationship. Thirdly, in certain specifications, competition is most positively correlated with product innovation when a firm is more advanced than its main competitor. In other cases, this correlation is strongest for firms that are at the same technology level as their competitors. However, the differences in the correlations between more and less advanced firms are not always significant.

Suggested Citation

  • Simon Alder, 2010. "Competition and innovation: does the distance to the technology frontier matter?," IEW - Working Papers 493, Institute for Empirical Research in Economics - University of Zurich.
  • Handle: RePEc:zur:iewwpx:493
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    File URL: http://www.econ.uzh.ch/static/wp_iew/iewwp493.pdf
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    References listed on IDEAS

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    1. 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.
    2. Carlin Wendy & Schaffer Mark & Seabright Paul, 2004. "A Minimum of Rivalry: Evidence from Transition Economies on the Importance of Competition for Innovation and Growth," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 3(1), pages 1-45, September.
    3. Philippe Aghion & Richard Blundell & Rachel Griffith & Peter Howitt & Susanne Prantl, 2009. "The Effects of Entry on Incumbent Innovation and Productivity," The Review of Economics and Statistics, MIT Press, vol. 91(1), pages 20-32, February.
    4. Rita Almeida & Ana Margarida Fernandes, 2008. "Openness and Technological Innovations in Developing Countries: Evidence from Firm-Level Surveys," Journal of Development Studies, Taylor & Francis Journals, vol. 44(5), pages 701-727.
    5. Ai, Chunrong & Norton, Edward C., 2003. "Interaction terms in logit and probit models," Economics Letters, Elsevier, vol. 80(1), pages 123-129, July.
    6. Bartelsman, Eric J & Haskel, Jonathan & Martin, Ralf, 2008. "Distance to Which Frontier? Evidence on Productivity Convergence from International Firm-level Data," CEPR Discussion Papers 7032, C.E.P.R. Discussion Papers.
    7. Alexander Coad, 2008. "Distance to Frontier and Appropriate Business Strategy," Papers on Economics and Evolution 2008-07, Philipps University Marburg, Department of Geography.
    8. 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.
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    Cited by:

    1. Michael Peneder & Martin Woerter, 2014. "Competition, R&D and innovation: testing the inverted-U in a simultaneous system," Journal of Evolutionary Economics, Springer, vol. 24(3), pages 653-687, July.
    2. Curzi, Daniele & Raimondi, Valentina & Olper, Alessandro, 2013. "Quality Upgrading, Competition and Trade Policy: Evidence from the Agri-Food Sector," Proceedings Issues, 2013: Productivity and Its Impacts on Global Trade, June 2-4, 2013. Seville, Spain 152387, International Agricultural Trade Research Consortium.
    3. Ljiljana Božić & Pierre Mohnen, 2016. "Determinants of Innovation in Croatian SMEs – Comparison of Service and Manufacturing Firms," Tržište/Market, Faculty of Economics and Business, University of Zagreb, vol. 28(1), pages 7-27.

    More about this item

    Keywords

    Market Structure; competition; innovation; technology adaption; growth;

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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