The Effects of Entry on Incumbent Innovation and Productivity

How does firm entry affect innovation incentives and productivity growth in incumbent firms? Micro-data suggests that there is heterogeneity across industries--incumbents in technologically advanced industries react positively to foreign firm entry, but not in laggard industries. To explain this pattern, we introduce entry into a Schumpeterian growth model with multiple sectors which differ by their distance to the technological frontier. We show that technologically advanced entry threat spurs innovation incentives in sectors close to the technological frontier--successful innovation allows incumbents to prevent entry. In laggard sectors it discourages innovation--increased entry threat reduces incumbents' expected rents from innovating. We find that the empirical patterns hold using rich micro-level productivity growth and patent panel data for the UK, and controlling for the endogeneity of entry by exploiting the large number of policy reforms undertaken during the Thatcher era.

Competition and Innovation: An Inverted U Relationship

This paper investigates the relationship between product market competition (PMC) and innovation. A growth model is developed in which competition may increase the incremental profit from innovating; on the other hand, competition may also reduce innovation incentives for laggards. There are four key predictions. First, the relationship between product market competition (PMC) and innovation is an inverted U-shape. 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. Fourth, firms may innovate more if subject to higher debt-pressure, especially at lower levels of PMC. We confront these predictions with data on UK firms' patenting activity at the US patenting office. They are found to accord well with observed behavior.

Competition and innovation: an inverted U relationship

This paper investigates the relationship between product market competition (PMC) and innovation. A Schumpeterian growth model is developed in which firms innovate ѳtep-by-stepҬ 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 Ѯeck-and-neckness' among firms should decrease with PMC. Third, the higher the average degree of Ѯeck-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.

The effects of entry on incumbent innovation and productivity

How does firm entry affect innovation incentives in incumbent firms? Micro data 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. To explain this pattern, we use a Schumpeterian growth model with entry and multiple sectors which differ by their distance to the world technology frontier. We show that technologically advanced entry threat spurs innovation incentives in sectors close to the technology frontier - successful innovation allows incumbents to survive the threat. In laggard sectors it discourages innovation - increased entry threat reduces incumbents' expected rents from innovating. We find that the empirical patterns hold using rich micro panel data for the UK, and controlling for the endogeneity of entry by exploiting major European and UK policy reforms. -- Wie wirkt Markteintritt auf Innovationsanreize? Deskriptive Auswertungen von Mikrodaten zeigen industriespezifische Heterogenität in den Reaktionen etablierter Unternehmen. Konkret zeigt sich, dass das Produktivitätswachstum und die Patentzahlen etablierter Unternehmen in technologisch hochentwickelten Industrien positiv korrelieren mit vorhergehendem Markteintritt ausländischer Unternehmen, die neue Produktionseinheiten aufbauen. Dies steht im Gegensatz zur Situation in Industrien, die hinter dem technisch Machbaren zurückbleiben. Um dieses Muster zu erklären, verwenden wir ein endogenes Wachstumsmodell mit Markteintritt und multiplen Sektoren in unterschiedlicher Distanz von der weltweit geltenden, technologischen Entwicklungsgrenze. Markteintrittsdruck seitens technologisch fortschrittlicher Unternehmen erhöht die Innovationsanreize etablierter Unternehmen in Sektoren nahe der technologischen Entwicklungsgrenze, da etablierte Unternehmen dort durch erfolgreiche Innovationstätigkeit drohenden Markteintritt überleben können. In technologisch rückständigen Industrien reduziert Markteintrittsdruck die im Erfolgsfalle zu erwartende Innovationsrente etablierter Unternehmen und dämpft somit deren Innovationsanreize. Wir zeigen empirische Evidenz, die im Einklang mit diesen Kausalzusammenhängen steht. Für die empirische Analyse verwenden wir umfassende Paneldaten auf Mikroebene in Großbritannien und wir nutzen wichtige Politikänderungen auf EU-Ebene und in Großbritannien, um für die Endogenität von Markteintritt zu kontrollieren.entry threat,innovation incentives,distance to the technology frontier,firm entry,productivity growth,patenting

The effects of entry on incumbent innovation and productivity

How does firm entry affect innovation incentives in incumbent firms? Micro data 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. To explain this pattern, we use a Schumpeterian growth model with entry and multiple sectors which differ by their distance to the world technology frontier. We show that technologically advanced entry threat spurs innovation incentives in sectors close to the technology frontier - successful innovation allows incumbents to survive the threat. In laggard sectors it discourages innovation - increased entry threat reduces incumbents' expected rents from innovating. We find that the empirical patterns hold using rich micro panel data for the UK, and controlling for the endogeneity of entry by exploiting major European and UK policy reforms.Wie wirkt Markteintritt auf Innovationsanreize? Deskriptive Auswertungen von Mikrodaten zeigen industriespezifische Heterogenität in den Reaktionen etablierter Unternehmen. Konkret zeigt sich, dass das Produktivitätswachstum und die Patentzahlen etablierter Unternehmen in technologisch hochentwickelten Industrien positiv korrelieren mit vorhergehendem Markteintritt ausländischer Unternehmen, die neue Produktionseinheiten aufbauen. Dies steht im Gegensatz zur Situation in Industrien, die hinter dem technisch Machbaren zurückbleiben. Um dieses Muster zu erklären, verwenden wir ein endogenes Wachstumsmodell mit Markteintritt und multiplen Sektoren in unterschiedlicher Distanz von der weltweit geltenden, technologischen Entwicklungsgrenze. Markteintrittsdruck seitens technologisch fortschrittlicher Unternehmen erhöht die Innovationsanreize etablierter Unternehmen in Sektoren nahe der technologischen Entwicklungsgrenze, da etablierte Unternehmen dort durch erfolgreiche Innovationstätigkeit drohenden Markteintritt überleben können. In technologisch rückständigen Industrien reduziert Markteintrittsdruck die im Erfolgsfalle zu erwartende Innovationsrente etablierter Unternehmen und dämpft somit deren Innovationsanreize. Wir zeigen empirische Evidenz, die im Einklang mit diesen Kausalzusammenhängen steht. Für die empirische Analyse verwenden wir umfassende Paneldaten auf Mikroebene in Großbritannien und wir nutzen wichtige Politikänderungen auf EU-Ebene und in Großbritannien, um für die Endogenität von Markteintritt zu kontrollieren

Entry and Productivity Growth: Evidence From Microlevel Panel Data

How does entry affect productivity growth of incumbents? In this paper we exploit policy reforms in the United Kingdom that changed entry conditions by opening up the U.K. economy during the 1980s and panel data on British establishments to shed light on this question. We show that more entry, measured by a higher share of industry employment in foreign firms, has led to faster total factor productivity growth of domestic incumbent firms and thus to faster aggregate productivity growth.Economic

Competition and Innovation: An Inverted-U Relationship

This paper investigates the relationship between product market competition and innovation. We find strong evidence of an inverted-U relationship using panel data. We develop a model where competition discourages laggard firms from innovating but encourages neck-and-neck firms to innovate. Together with the effect of competition on the equilibrium industry structure, these generate an inverted-U. Two additional predictions of the model—that the average technological distance between leaders and followers increases with competition, and that the inverted-U is steeper when industries are more neck-and-neck—are both supported by the data.Economic

The effects of entry on incumbent innovation and productivity

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 effects of entry on incumbent innovation and productivity

"Wie wirkt Markteintritt auf Innovationsanreize? Deskriptive Auswertungen von Mikrodaten zeigen industriespezifische Heterogenität in den Reaktionen etablierter Unternehmen. Konkret zeigt sich, dass das Produktivitätswachstum und die Patentzahlen etablierter Unternehmen in technologisch hochentwickelten Industrien positiv korrelieren mit vorhergehendem Markteintritt ausländischer Unternehmen, die neue Produktionseinheiten aufbauen. Dies steht im Gegensatz zur Situation in Industrien, die hinter dem technisch Machbaren zurückbleiben. Um dieses Muster zu erklären, verwenden wir ein endogenes Wachstumsmodell mit Markteintritt und multiplen Sektoren in unterschiedlicher Distanz von der weltweit geltenden, technologischen Entwicklungsgrenze. Markteintrittsdruck seitens technologisch fortschrittlicher Unternehmen erhöht die Innovationsanreize etablierter Unternehmen in Sektoren nahe der technologischen Entwicklungsgrenze, da etablierte Unternehmen dort durch erfolgreiche Innovationstätigkeit drohenden Markteintritt überleben können. In technologisch rückständigen Industrien reduziert Markteintrittsdruck die im Erfolgsfalle zu erwartende Innovationsrente etablierter Unternehmen und dämpft somit deren Innovationsanreize. Wir zeigen empirische Evidenz, die im Einklang mit diesen Kausalzusammenhängen steht. Für die empirische Analyse verwenden wir umfassende Paneldaten auf Mikroebene in Großbritannien und wir nutzen wichtige Politikänderungen auf EU-Ebene und in Großbritannien, um für die Endogenität von Markteintritt zu kontrollieren." (Autorenreferat)"How does firm entry affect innovation incentives in incumbent firms? Micro data 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. To explain this pattern, we use a Schumpeterian growth model with entry and multiple sectors which differ by their distance to the world technology frontier. We show that technologically advanced entry threat spurs innovation incentives in sectors close to the technology frontier - successful innovation allows incumbents to survive the threat. In laggard sectors it discourages innovation - increased entry threat reduces incumbents' expected rents from innovating. We find that the empirical patterns hold using rich micro panel data for the UK, and controlling for the endogeneity of entry by exploiting major European and UK policy reforms." (author's abstract