The Effects of Entry on Incumbent Innovation and Productivity

52 Pages Posted: 3 Jan 2006

See all articles by Philippe Aghion

Philippe Aghion

College de France and London School of Economics and Political Science, Fellow; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Richard W. Blundell

UCL; IFS; IZA Institute of Labor Economics; Centre for Economic Policy Research (CEPR)

Rachel Griffith

Institute for Fiscal Studies (IFS); University of Manchester; Centre for Economic Policy Research (CEPR)

Peter Howitt

Brown University - Department of Economics; National Bureau of Economic Research (NBER)

Susanne Prantl

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods

Multiple version iconThere are 2 versions of this paper

Date Written: October 2005

Abstract

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 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 entry threat spurs innovation incentives in technologically advanced sectors - successful innovation allows incumbents to prevent entry. In laggard sectors it discourages innovation - increased entry 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.

Keywords: Entry, innovation, growth

JEL Classification: D21, F21, L10, O31

Suggested Citation

Aghion, Philippe and Blundell, Richard W. and Griffith, Rachel and Howitt, Peter and Prantl, Susanne, The Effects of Entry on Incumbent Innovation and Productivity (October 2005). CEPR Discussion Paper No. 5323. Available at SSRN: https://ssrn.com/abstract=873510

Philippe Aghion (Contact Author)

College de France and London School of Economics and Political Science, Fellow ( email )

London
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Richard W. Blundell

UCL ( email )

Department of Economics
Gower Street
London, WC1E 6BT
United Kingdom
+44 20 7504 5863 (Phone)
+44 20 7916 2773 (Fax)

HOME PAGE: http://www.ucl.ac.uk/~uctp39a/

IFS

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HOME PAGE: http://www.ifs.org.uk

IZA Institute of Labor Economics

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Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Rachel Griffith

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London WC1E 7AE
United Kingdom
+44 20 7291 4800 (Phone)
+44 20 7323 4780 (Fax)

University of Manchester ( email )

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Oxford Road
Manchester, M13 9PL
United Kingdom

HOME PAGE: http://www.ifs.org.uk/people/profile?id=37

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Peter Howitt

Brown University - Department of Economics ( email )

Box B
Providence, RI 02912
United States
401-863-2145 (Phone)
401-863-1970 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Susanne Prantl

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

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