Foreign Competition and Innovation

27 Pages Posted: 6 Nov 2023 Last revised: 7 Nov 2023

Date Written: November 2023

Abstract

Empirical studies have found that enhanced foreign competition can encourage or discourage innovation. To address this relationship, I examine a market structure in which a small number of large multi-product oligopolists compete with a large number of small single-product firms in the same industry. The single-product firms are short-lived while the multi-product firms live forever, and the large firms invest in innovation in order to enlarge their product spans. All firms export. I show that an increase in the competitiveness of foreign firms can increase or reduce innovation efforts of a large multi-product firm. Moreover, changes in the incentives to innovate can be different for more-productive and less-productive oligopolists. As a result, aggregate sectoral innovation may rise or decline, depending on the productivity distribution of the oligopolists. I also show that changes in short-term operating profits may not be aligned with changes in the incentives to invest in innovation.

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Suggested Citation

Helpman, Elhanan, Foreign Competition and Innovation (November 2023). NBER Working Paper No. w31840, Available at SSRN: https://ssrn.com/abstract=4624243

Elhanan Helpman (Contact Author)

Harvard University ( email )

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