The effects of entry on incumbent innovation and productivity

Philippe Aghion, Richard Blundell (), Rachel Griffith, Peter Howitt and Susanne Prantl

Discussion Papers, Research Unit: Competition and Innovation from WZB Berlin Social Science Center

Abstract: How does firm entry affect innovation incentives in incumbent firms? Micro data suggest that there is heterogeneity across industries. Specifically, incumbent productivity growth and patenting is positively correlated with lagged greenfield foreign firm entry in technologically advanced industries, but not in laggard industries. To explain this pattern, we use a Schumpeterian growth model with entry and multiple sectors which differ by their distance to the world technology frontier. We show that technologically advanced entry threat spurs innovation incentives in sectors close to the technology frontier - successful innovation allows incumbents to survive the threat. 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 panel data for the UK, and controlling for the endogeneity of entry by exploiting major European and UK policy reforms.

Keywords: entry threat; innovation incentives; distance to the technology frontier; firm entry; productivity growth; patenting (search for similar items in EconPapers)
JEL-codes: D21 F21 L10 O31 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (56)

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Related works:
Journal Article: The Effects of Entry on Incumbent Innovation and Productivity (2009)
Working Paper: The Effects of Entry on Incumbent Innovation and Productivity (2009)
Working Paper: The Effects of Entry on Incumbent Innovation and Productivity (2006)
Working Paper: The Effects of Entry on Incumbent Innovation and Productivity (2005)
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