Competition and Innovation: The Inverted-U Relationship Revisited
45 Pages Posted: 29 Feb 2012 Last revised: 16 Jul 2014
Date Written: February 29, 2012
Abstract
I re-examine the inverted-U relationship between competition and innovation (originally modeled and tested by Aghion et al. (2005) by using data from publicly traded manufacturing firms in the US. I control for the possible endogeneity of competition by using a trade-weighted average of industry exchange rates as the instrument. I find a mildly negative relationship between competition (as measured by the inverse of markups) and innovation (as measured by citation-weighted patents). The relationship is robust to many alternative assumptions and specifications. To reconcile the mildly negative relationship in the US data with the inverted-U relationship that Aghion et al. (2005) find in the UK data, I modify their theoretical model and show that the modified model can explain both negative and inverted-U relationships. The key theoretical assumption is that the UK manufacturing industries are technologically more neck-and-neck than their counterparts in the US. I find support for this assumption in the data.
Keywords: Competition, Market Structure, Innovation, Schumpeter
JEL Classification: L10, O30
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Competition and Productivity in Japanese Manufacturing Industries
By Yosuke Okada
-
Competition and Innovation: The Inverted-U Relationship Revisited
-
By Yu Sang Chang and Seung Jin Baek
-
Competition & Innovation: New Evidence from US Patent and Productivity Data
By Juan A. Correa and Carmine Ornaghi
-
Industrial Concentration, Price-Cost Margins, and Innovation
By David Flath
-
Are There Any Cournot Industries?
By David Flath
-
By Michele Boldrin, Juan Allamand, ...