Sign up & Download
Sign in

Competition and innovation: an inverted U relationship

by P. Aghion, N. Bloom, R. Blundell, R. Griffith, P. Howitt
()

Abstract

This paper investigates the relationship between product market competition (PMC) and innovation. A Schumpeterian growth model is developed in which firms innovate ‘step-by-step’, and where both technological leaders and their followers engage in R&D activities. In this model, competition may increase the incremental profit from innovating; on the other hand, competition may also reduce innovation incentives for laggards. This model generates four main predictions which we test empirically. First, the relationship between product market competition (PMC) and innovation is an inverted U-shape: the escape competition effect dominates for low initial levels of competition, whereas the Schumpeterian effect dominates at higher levels of competition. Second, the equilibrium degree of technological ‘neck-and-neckness’ among firms should decrease with PMC. Third, the higher the average degree of ‘neck-and-neckness’ in an industry, the steeper the inverted-U relationship between PMC and innovation in that industry. Fourth, firms may innovate more if subject to higher debt-pressure, especially at lower levels of PMC. We confront these four predictions with a new panel data set on UK firms’ patenting activity at the US patenting office. The inverted U relationship, the neck and neck, and the debt pressure predictions are found to accord well with observed behavior in the data.

Cite this document (BETA)

Readership Statistics

65 Readers on Mendeley
by Discipline
 
 
 
by Academic Status
 
28% Ph.D. Student
 
12% Researcher (at an Academic Institution)
 
11% Student (Master)
by Country
 
5% United Kingdom
 
5% United States
 
3% Netherlands

Sign up today - FREE

Mendeley saves you time finding and organizing research. Learn more

  • All your research in one place
  • Add and import papers easily
  • Access it anywhere, anytime

Start using Mendeley in seconds!

Already have an account? Sign in