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Competition and Innovation: Pushing Productivity Up or Down?

CentER Discussion Paper No. 2010-52

47 Pages Posted: 25 May 2010 Last revised: 27 May 2010

Erik Brouwer

Tilburg Law and Economics Center (TILEC)

Henry van der Wiel

affiliation not provided to SSRN

Date Written: May 18, 2010

Abstract

This paper examines the relationship between competition, innovation and productivity for the Netherlands. We use industry level data aggregated from micro data as well as moments from firm level data for the period 1996-2006. We match innovation data from Community innovation Survey with accounting data to link innovative activities with performance at the industry level. We find strong evidence for a positive impact of competition on Total Factor Productivity (TFP) at the industry level. Competition directly increases TFP by reducing X-inefficiencies and removing inefficient firms from markets, but also through more innovation. Nonetheless, there exists an inverted U-curve between competition and innovation for the Netherlands, at least for manufacturing industries. Yet, our results indicate that a negative effect of competition on productivity through lower innovation expenditures arises only at very high levels of competition.

Keywords: Competition, Innovation, Profit Elasticity, Productivity

JEL Classification: D40, L16, O31

Suggested Citation

Brouwer, Erik and van der Wiel, Henry, Competition and Innovation: Pushing Productivity Up or Down? (May 18, 2010). CentER Discussion Paper No. 2010-52. Available at SSRN: https://ssrn.com/abstract=1615508 or http://dx.doi.org/10.2139/ssrn.1615508

Erik Brouwer (Contact Author)

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Henry Van der Wiel

affiliation not provided to SSRN ( email )

No Address Available

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