TY - JOUR AU - Aghion,Philippe AU - Blundell,Richard AU - Griffith,Rachel AU - Howitt,Peter AU - Prantl,Susanne TI - The Effects of Entry on Incumbent Innovation and Productivity JF - National Bureau of Economic Research Working Paper Series VL - No. 12027 PY - 2006 Y2 - February 2006 UR - http://www.nber.org/papers/w12027 L1 - http://www.nber.org/papers/w12027.pdf N1 - Author contact info: Philippe Aghion Department of Economics Harvard University 1805 Cambridge St Cambridge, MA 02138 Tel: 617/495-6675 Fax: 617/495-4341 E-Mail: paghion@fas.harvard.edu Richard Blundell University College London Department of Economics Gower Street London, ENGLAND E-Mail: r.blundell@ucl.ac.uk Rachel Griffith IFS 7 Ridgmont Street London WC1E 7AE UK E-Mail: rgriffith@ifs.org.uk Peter Howitt Department of Economics Brown University, Box B Providence, RI 02912 E-Mail: peter_howitt@brown.edu Susanne Prantl Department of Economics University of Cologne Albertus-Magnus-Platz D-50923 Cologne Germany E-Mail: prantl@wiso.uni-koeln.de AB - 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. ER -