Competition and Innovation: Pushing Productivity Up or Down?
Tilburg Law and Economics Center (TILEC)
Henry van der Wiel
affiliation not provided to SSRN
May 18, 2010
CentER Discussion Paper No. 2010-52
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.
Number of Pages in PDF File: 47
Keywords: Competition, Innovation, Profit Elasticity, Productivity
JEL Classification: D40, L16, O31
Date posted: May 25, 2010 ; Last revised: May 27, 2010