The Effects of Entry on Incumbent Innovation and Productivity

52 Pages Posted: 4 May 2006 Last revised: 13 Nov 2022

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; 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 Institute for Research on Collective Goods

Multiple version iconThere are 2 versions of this paper

Date Written: February 2006

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 foreign firm 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 technologically advanced entry threat spurs innovation incentives in sectors close to the technological frontier--successful innovation allows incumbents to prevent entry. In laggard sectors it discourages innovation--increased entry threat 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.

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 (February 2006). NBER Working Paper No. w12027, Available at SSRN: https://ssrn.com/abstract=885301

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)

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United Kingdom

National Bureau of Economic Research (NBER)

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Richard W. Blundell

UCL ( email )

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Centre for Economic Policy Research (CEPR)

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Rachel Griffith

Institute for Fiscal Studies (IFS) ( email )

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University of Manchester ( email )

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Centre for Economic Policy Research (CEPR)

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Peter Howitt

Brown University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Susanne Prantl

Max Planck Institute for Research on Collective Goods ( email )

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Germany