Competitive Pressure: The Effects on Investments in Product and Process Innovation

Jan Boone

RAND Journal of Economics, 2000, vol. 31, issue 3, 549-569

Abstract: I analyze the effects of competitive pressure on a firm's incentives to invest in product and process innovations. I present a framework incorporating the selection and adaptation effects of product market competition on efficiency and the Schumpeterian argument for monopoly power. The effects of competition on a firm's innovations depend on whether a firm is complacent, eager, struggling, or faint, which is determined by the firm's efficiency level relative to that of its opponents. Finally, the following tradeoff is pointed out: a rise in competitive pressure cannot raise both product and process innovations at the industry level.

Date: 2000
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