NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Competition and Innovation: An Inverted U Relationship

Philippe Aghion, Nicholas Bloom, Richard Blundell, Rachel Griffith, Peter Howitt

NBER Working Paper No. 9269
Issued in October 2002
NBER Program(s):   EFG   PR

This paper investigates the relationship between product market competition (PMC) and innovation. A growth model is developed in which competition may increase the incremental profit from innovating; on the other hand, competition may also reduce innovation incentives for laggards. There are four key predictions. First, the relationship between product market competition (PMC) and innovation is an inverted U-shape. Second, the equilibrium degree of technological neck-and-neckness' among firms should decrease with PMC. Third, the higher the average degree of neck-and-neckness' in an industry, the steeper the inverted-U relationship. Fourth, firms may innovate more if subject to higher debt-pressure, especially at lower levels of PMC. We confront these predictions with data on UK firms' patenting activity at the US patenting office. They are found to accord well with observed behavior.

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Document Object Identifier (DOI): 10.3386/w9269

Published: Aghion, Philippe, Nick Bloom, Richard Blundell, Rachel Griffith and Peter Howitt. "Competition And Innovation: An Inverted-U Relationship," Quarterly Journal of Economics, 2005, v120(2,May), 701-728.

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