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The effects of entry on incumbent innovation and productivity

Aghion, P.; Blundell, R.; Griffith, R.; Howitt, P.; Prantl, S.; (2006) The effects of entry on incumbent innovation and productivity. (NBER Working Papers 12027). National Bureau of Economic Research: Cambridge, US. Green open access

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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.

Type: Working / discussion paper
Title: The effects of entry on incumbent innovation and productivity
Open access status: An open access version is available from UCL Discovery
Publisher version: http://www.nber.org/papers/w12027
Language: English
Additional information: Please see http://eprints.ucl.ac.uk/15901/ for a version published in the Review of Economics and Statistics
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of SandHS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/17773
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