Competition, R&D and Innovation: Testing the Inverted-U in a Simultaneous System

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractTo address the relationship between innovation and competition we jointly estimate the opportunity, production, and impact functions of innovation in a simultaneous system. Based on Swiss micro-data, we apply a 3-SLS system estimation. The findings confirm a robust inverted-U relationship, in which a rise in the number of competitors at low levels of initial competition increases the firm's research effort, but at a diminishing rate, and the research effort ultimately decreases at high levels of competition. When we split the sample by firm types, the inverted-U shape is steeper for creative firms than for adaptive ones. The numerical solution indicates three particular configurations of interest: 1. an uncontested monopoly with low innovation, 2. low competition with high innovation, and 3. a "no innovation trap" at very high levels of competition. The distinction between solution 1. and 2. corresponds to Arrow's positive effect of competition on innovation, whereas the difference between outcomes 2. and 3. captures Schumpeter's positive effect of market power on innovation. Simulating changes of the exogenous variables, technology potential, demand growth, firm size and exports have a positive impact on innovation, while foreign ownership has a negative effect, and higher appropriability has a positive impact on the number of competitors.

Competition Law and Economic Regulation

“…13 However, there is also an optimal level of competition, which partly depends on market size (Amsden and Singh, 1994). Many studies have investigated the relationship between competition and innovation (e.g., Aghion, Bloom, Blundell and Howitt, 2005;Aghion, Braun and Fedderke, 2008;Blundell, Griffith and Van Reenan, 1999;Peneder and Woerter, 2013). These studies find an inverted-U relationship between competition and innovation.…”

Innovation, competition and productivity

“…Starting from the model developed in Peneder and Wörter (), we first set up a simultaneous system of three equations to disentangle the mutual impact of innovation and competition. Similar to the CDM model, we apply separate equations to estimate R&D expenditures as an input and innovation as its output.…”

“…Different from our analysis, it does not consider competition as an endogenous determinant of innovation and productivity. In contrast, Peneder and Wörter () accounted for the reverse causality between competition and innovation, but did not address productivity.…”