The Effects of Entry on Incumbent Innovation and Productivity

Abstract

Abstract-How does firm entry affect innovation incentives in incumbent firms? Microdata suggest that there is heterogeneity across industries. Specifically, incumbent productivity growth and patenting is positively correlated with lagged greenfield foreign firm entry in technologically advanced industries, but not in laggard industries. In this paper we provide evidence that these correlations arise from a causal effect predicted by Schumpeterian growth theory-the threat of technologically advanced entry spurs innovation incentives in sectors close to the technology frontier, where successful innovation allows incumbents to survive the threat, but discourages innovation in laggard sectors, where the threat reduces incumbents' expected rents from innovating. We find that the empirical patterns hold using rich micro panel data for the United Kingdom. We control for the endogeneity of entry by exploiting major European and U.K. policy reforms, and allow for endogeneity of additional factors. We complement the analysis for foreign entry with evidence for domestic entry and entry through imports.

Cross-Border Investment, Heterogeneous Workers, and Employment Security – Evidence from Germany

“…23 We also investigated whether inward FDI from the US has different effects since these firms often operate at or close to the technological frontier (Aghion, Blundell, Griffith, Howitt, and Prantl, 2009), but we did not find evidence for significant effects of FDI from the US.…”

“…Furthermore, since firms that engage in FDI have a productivity advantage, technology spillovers to firms in the host country can be expected. However, job creation in new plants can be accompanied by reduced innovation incentives for technological laggards (Aghion, Blundell, Griffith, Howitt, and Prantl, 2009), rising wages, or a crowding out of domestic production (Kosova, 2010) that may also lead to a reduction in labour demand and job security in the host country. From the perspective of the home country, horizontal outward FDI might substitute for exports and thus reduce domestic production according to this trade-theoretical model framework.…”

Subsidizing National Champions: An Evolutionary Perspective

“…According to Aghion et al (2008), for firms at the technology frontier, constant innovation is the only way to escape competition, either from new entrants or existing firms. Competition should thus provide a disciplining effect on firms, and lead to innovation.…”

“…Such a policy harms the process of creative destruction in two ways. First, concentrating on incumbent firms prevents the positive effects of what Aghion et al (2008) term "entrycompetition," i.e., competition resulting from the threat of new entry. Furthermore, politicians are reluctant to admit that one of their projects has failed unless they are absolutely forced to by some spectacular or public event.…”

“…In this context, Aghion et al (2008) introduce the notion of an escapecompetition effect where constant innovation is the only way to escape competition, secure a stable market position, and guarantee at least a certain level of employment. An in-depth analysis of the motivations of a nonbenevolent government is outside the scope of our simple model, but we return to this issue in Section 5, with real-life examples.…”