Competition and Heterogeneous Innovation Qualities: Evidence from a Natural Experiment

Zhenjun Yan, Xinyan Wu, Jing Li and Bingqing Liang
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Zhenjun Yan: School of Economics and Resource Management, Beijing Normal University, Beijing 100875, China
Xinyan Wu: School of Economics and Resource Management, Beijing Normal University, Beijing 100875, China
Jing Li: School of Economics and Resource Management, Beijing Normal University, Beijing 100875, China
Bingqing Liang: School of Economics and Resource Management, Beijing Normal University, Beijing 100875, China

Sustainability, 2022, vol. 14, issue 13, 1-21

Abstract: Innovations differ substantially in their qualities, from major breakthroughs to small incremental refinements. What is the relationship between product market competition and the quality of innovations? We develop a model where competition encourages high-quality firms to innovate but discourages low-quality firms from innovating and examine the impact of competition on the quality of innovations, taking the implementation of the negative list system for market access in China as a natural experiment. It is found that competition has twofold impacts on the incentives of innovation and that competition improves the overall innovation quality through the improvement of innovation resource allocation. More competition implies a higher elasticity of substitution, leading to stronger incentives for innovation. Meanwhile, competition also decreases industry profits and increases the cost of innovation, which reduces the expected return on innovation, resulting in fewer incentives for innovation. The findings suggest that while R&D subsidies increase aggregate R&D investment, they encourage the survival and expansion of low-quality firms at the expense of high-quality firms and lead to misallocation of R&D resources, resulting in the decline of overall innovation qualities.

Keywords: competition; quality of innovation; allocation of R&D resources; R&D subsidy (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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