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.

The Adoption of Social Enterprise Software

“…As linking enterprise and social software can be interpreted as a process innovation, the same argument should also hold in this context. Aghion et al (2009) support this argument as they stress the impact of the competitive environment, measured as new firm entry, on the incentives to adopt innovations. However, they show differences for high tech industries and laggards as industries near to the technological frontier react positive in terms of innovative activity to new firm entry, laggards on the other hand are negatively affected.…”

“…As for the first check we estimated the model as a simple probit model without sample selection only with firms using both social software and enterprise software. Table 3 shows the average marginal effects of the probit estimation of equation (2). We use the same exogenous variables as in the bivariate probit with sample selection except for the exclusion restriction.…”

“…3 See for example Oracle Social CRM: http://www.ababj.com/crm/oracle-crm-release-supportsmobile-social-networking.html 4 See for example Novell Vibe Cloud: http://www.novell.com/products/vibecloud/features/enterprise-social-software.html 1 instance, the adoption might depend on the availability of qualified personnel (Wozniak 1987;Lo and Sutthiphisal 2010) or on the size of the firm (Davies 1979;Frambach and Schillewaert 2002). The firms' decision to engage in such a process innovation may also depend on former innovation experience (Flaig and Stadler 1994) or on the competitive environment a firm is facing (Bertschek 1995, Aghion et al 2009). …”

Incumbents' Responses to Innovative Entrants A Multi-Country Dynamic Analysis

“…We discuss our results in light of these different entrant forces. Previous literature, in contrast, largely disregards this aspect and focuses exclusively on the competition effect (e.g., Aghion et al, 2009;Iacovone et al, 2011;Andersson et al, 2012).Fundamental results on the effect of entry on incumbents are scarce. Recent studies found that entrants positively influence incumbents' general innovation activity while incumbents responded asymmetrically, depending on their competitive performance (Aghion and Bessonova, 2006;Aghion et al, 2009;Iacovone et al, 2011;Fritsch and Changoluisa, 2014).…”

“…Recent studies found that entrants positively influence incumbents' general innovation activity while incumbents responded asymmetrically, depending on their competitive performance (Aghion and Bessonova, 2006;Aghion et al, 2009;Iacovone et al, 2011;Fritsch and Changoluisa, 2014). Such studies utilized quantitative entry measures (e.g., entry rates, import flows, or employment size) and focused on industry-level entry into incumbents' domestic markets.…”